The Dutch pension asset manager's Asia Pacific head of real estate says his team has just had one of its busiest years ever and that 2021 is looking similarly promising.
Who are you invested with in the Korea hedge fund market?
Bennett: The HFG Korea Fund has invested with just over half of the 28 Korea-focused hedge funds that comprise our universe of investee funds, represented by just over 20 managers. Among these funds there has been a considerable discrepancy in returns.
In general, this discrepancy has been attributable to differences between those managers who have and have not been able to execute a successful long/short strategy. Another factor influencing performance is due to differences in a manager's Korean won hedging policy; as those who have taken a passive stance in this regard have suffered given the Korean won's 30% depreciation against the dollar this year.
How has Korea's fund management industry fared?
This year poor performance has had dramatic consequences. We have witnessed two Korea-focused management companies shut down this year and six failed Korea-focused hedge fund launches.
Fees will continue to come under pressure, and given that the majority of the Korea-focused funds have less than $50 million in assets, these firms will find it difficult to support a business on which increasing infrastructural demands are placed upon it. As a result, the universe of Korea-focused funds is going to contract considerably, which I believe indicative of the industry at large.
What has been your performance for this year?
The HFG Korea Fund has returned approximately -30% year-to-date ending October (though the final NAV is yet to be calculated), while the Kospi index (denominated in US dollars) is down 57.54%. In our universe of Korea-focused funds, the range of returns this year has been -8% to -68% to the end of October.
We benchmark against the Kospi and Eurekahedge Korea Hedge Fund Index. Eurekahedge's year-to-date performance as of end-October is -25%, though I don't believe all representative funds have reported. There are only seven, compared to our universe of 28. The HFG Korea Fund's performance, however, for most of this year has been slightly superior to the Eurekahedge Korea Hedge Fund Index, though we take little consolation in this.
What steps do you have to take to improve performance?
We're behind the Eurekahedge Korea Hedge Fund Index if the October numbers hold, which I don't think they will as I can't see how the index is down only 5% when the market was down 30% in dollars. As not all underlying managers have reported, this -5% may be the result of only one manager's performance. As of the end of September, the HFG Korea Fund's performance was comparable to that of the Eurekahedge Korea Index, which is a more accurate comparison.
We realise that it's a hollow argument to proclaim the fund's attributes relative to an index when it's lost 30%.
We are disappointed in our performance and have taken measures to improve it by increasing allocation to high conviction managers and redeeming from those reliant on beta.
This is not unique to our fund but is indicative of most allocators to Asia-focused funds who can no longer justify their fees when the market has been responsible for most of their performance. We still hold to our conviction that if you want to allocate to the Korean market, the HFG Korea Fund is the best way to do so given its diversity, which, despite our portfolio rationalisation exercise, continues to include managers that are too small for institutional investors to access, and its low initial investment requirement relative to most of the underlying funds, namely $100,000 versus $1 million.
With regard to future participation, which hedge fund managers will you be taking on and which ones will you be tossing aside?
Recently HFG Investments took the decision to concentrate its portfolio on managers who have been able to successfully negotiate an extremely volatile market environment, a few of which have performed admirably under these conditions.
The fund eliminated much of its exposure to funds with unreasonably long biases, a lack of a coherent currency hedging policy and to those managers that have done a poor job in communicating their fund's performance.
Unlike more diversified funds of funds, the HFG Korea Fund has not experienced redemption mismatch issues between our underlying funds and investors, though it has limited its exposure to funds that offer restrictive liquidity terms, which we often find unwarranted.
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