Korean hedge fund rules under fire

Professionals call for liberalisation, while the National Pension Service says it will look to overseas hedge funds first as the onshore industry must mature.
Korean hedge fund rules under fire

Market professionals in Seoul are complaining that Korea’s rules for its new onshore hedge-fund industry are too onerous, while leading investors say they want the industry to improve before they allocate money to it.

A conference in Seoul last week organised by the Korea Capital Markets Institute (KCMI), and co-hosted by the Financial Supervisory Commission, the Financial Supervisory Service and the New York Hedge Fund Roundtable, saw professionals make a plea for liberalisation.

Jun Kwang-woo, chairman of the National Pension Service, said it was not ready to invest in local hedge funds at this time. The NPS has statutory rules against hedge funds in general although this could change – but Jun indicated the domestic industry is not sufficiently advanced yet to warrant allocations.

The NPS has an interest in seeing the local industry put on a proper footing. It allocates 8% of total AUM to alternative investments, at present all in private equity, real estate, and other non-hedge fund strategies.

However, in many other developed countries, pension funds allocate 20% or more to alternatives, with hedge funds part of the mix, to diversify the portfolio.

Jun says this positive experience means NPS is looking to add hedge funds to its portfolio, but it may decide to start overseas, as have other Korean investors such as Korea Post and Korea Investment Corporation.

Due to the restrictions on capital and other requirements to operate or service a local hedge fund, only 10% of financial institutions are eligible to participate. The vast majority of asset management companies, advisory firms, prime brokers and distributors cannot.

Executives tell AsianInvestor that while they do not expect a ‘big bang’ opening of the industry, they do hope to see steady, if incremental, progress.

The industry launched in December and now has about $500 million of total assets. Industry executives say most of these strategies have lost money so far, and there is little differentiation among available products.

Kim Jong-min, research fellow at KCMI, says demand has been weak. He suggests more information and transparency is needed to educate investors about hedge funds.

Despite the poor start, Kim believes that if the sector is liberalised and institutions such as NPS embrace it, the industry could grow to $16 billion by 2016. That is based on the early growth of the mutual funds industry, which expanded by 5% each year.

One of the measures industry executives want to see is a reduction in the minimum AUM size for potential licensees from W10 trillion ($8.7 billion) to W1 trillion. Similar restrictions for brokers can be eased.

The industry needs more players but it also needs to boost investor protection rules. And local executives would like to see the same rules applied to any funds launched in Korea by foreign asset managers.

¬ Haymarket Media Limited. All rights reserved.