NPS picks BlackRock, Grosvenor for first hedge fund portfolio

Korea's flagship state retirement fund has chosen the two asset managers to run a fund-of-hedge-funds mandate of up to $1 billion, which is expected to rise to $2 billion over time.
NPS picks BlackRock, Grosvenor for first hedge fund portfolio

Korea’s National Pension Service has chosen BlackRock and GCM Grosvenor Capital Management to manage a W1.2 trillion fund-of-hedge-funds portfolio, its first such mandate.

The W500 trillion ($442 billion) state retirement fund selected the two asset managers after completing due diligence on four managers; the other two were Blackstone and UBS. Investment consultancy Mercer is advising NPS on its hedge fund allocations.

BlackRock’s, the world’s biggest fund house with $4.7 trillion, had $21.3 billion in hedge funds at the end of 2015, while GCM Grosvenor, a fund-of-funds specialist, has $45 billion in AUM and had $26.7 billion invested in hedge funds as of the same date.

NPS will allocate up to $500 million, or 0.2% of its assets, to each of the two firms, and the investments will be implemented this year. 

The pension fund has decided to make a hedge fund allocation with a view to generating higher returns amid the prolonged low-interest-rate environment, despite such strategies being seen by many as high-risk in Korea.

It is also seeking to diversify its investment portfolio in other ways. The fund is increasing the proportion of overseas assets in its portfolio to counter the limited returns it is getting on domestic investments. The plan is to raise its allocation to overseas stocks, bonds and property to at least 30% by 2020, up from 23.5% as of end-2015, as reported.     

Chief investment officer Kang Myoun-wook said: “Our investment in overseas hedge funds is expected to mitigate the risk facing our entire portfolio, thus helping us to ensure stable profit.”  

The National Pension Fund Management Committee allowed the fund to start investing in hedge funds in February 2014, thus paving the way for greater portfolio diversification. 

An NPS spokesperson told AsianInvestor that the selection committee had undertaken both quantitative and qualitative analysis in the process of deciding on BlackRock and Grosvenor.

The fund's total investment in hedge fund strategies is expected ultimately to rise to $2 billion, 0.5% of its current AUM. This comes as the state fund moves to raise its alternative asset allocation from 5% to 10% over the next five years.

Market observers expect NPS to look at making direct investments in single-strategy hedge funds two years from now and to add more professionals to its team with this aim.

The new FoHF mandate is seen as an important landmark for NPS’s global portfolio and is expected to have an impact on other Korean institutional investors’ international strategies. 

Other pension schemes in the country are upbeat on potential returns from overseas hedge funds. The asset class has fallen short of performance expectations over the past couple of years, but in the medium- to long-term hedge funds will generate favourable returns, said Yoon Seung-joon, head of global alternative investments at Korean Teachers’ Credit Union.

Meanwhile, Korea Post is building a pool of hedge fund managers from which to draw for future mandates. The institution's $65 billion savings bureau recently issued an RFP for hedge managers for fixed income arbitrage and long/short structured credit.

NPS had initially intended to start investing in overseas hedge funds in 2015, as reported, but the plan was delayed by concerns about the potential outcome. The fund had appointed a head of hedge fund investments in September last year.

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