South Korean asset managers are warily awaiting possible regulatory changes that would pave the way for the development of an onshore hedge fund sector.

Financial Services Commission (FSC) chairman Kim Seok-dong, speaking at a recent hedge fund seminar in Seoul, says he has submitted an amendment to the enforcement decree of the capital market law, which would enable funds to leverage up to 400% of total assets.

More importantly, it would also remove a stipulation that each fund invest at least 40% of its assets in companies targeted for restructuring – a requirement regarded as a major barrier to the establishment of a viable onshore hedge fund market.

“Hedge funds will lay a foundation for the nation’s financial industry,” Kim told delegates. “I will provide the necessary support to launch them as soon as possible.”

The financial regulator has previously signalled its intentions to revise the capital market law but has left fund managers waiting. There is now more reason for optimism, as the FSC says amending the enforcement decree should only take up to three months.

The revision could be passed in the national congress by year-end, says Sung Jun Moon, director of Seoul-based AK Asset Management. The firm, along with Hong Kong-based associate AK Partners, manages about $720 million in Korean assets, including the Caymans-domiciled AK Jumong Fund, a Korean long/short equity strategy.

There are talented managers and seasoned hedge fund firms that have been awaiting the amendment, Moon notes, which the government had hoped to pass in 2010. “I expect that we will see onshore hedge funds launched by the end of this year. It would be big movement in the development of Korea’s capital market.”             

While the local market does not yet have the breadth of financial instruments available in places such as Hong Kong or New York, hedge funds would be able to invest in stocks, bonds and derivatives. Short positions could be taken using equity derivatives, such as equity swap products and equity-linked warrants, which are both offered by local securities firms, says Moon.

He predicts that institutional investors and high-net-worth individuals will be among the first to allocate to onshore funds. However, Moon adds, the government is considering a minimum subscription for retail investors of up to W500 million ($460,000), which would limit interest among individuals.

A handful of Korea-focused hedge funds are managed out of Singapore, Hong Kong and the US.

South Korea has been viewed keenly as a lucrative hedge fund greenfield by asset managers, given its high rate of capital accumulation and an eagerness by domestic institutional investors and state funds to diversify into alternative assets. The government intends to foster hedge fund-friendly regulation to help create jobs, tax revenues and growth within South Korea’s broader financial sector.