KITMC seeks partners for alternative investments

Hedge funds are expected to deliver opportunities for growing assets under management at the $20 billion Korea Investment Trust Management Company (KITMC).

The firm's overseas business unit, led by managing director Suh Jong-doo, is starting to emphasise international alternative-investment strategies. The division's other line of business, international equity mutual funds, comprises the bulk of its activity, but is seen as a declining area.

Locally domiciled, won-denominated funds for international equities have been popular products over the past few years -- until 2010, that is, thanks to the removal of an exemption on capital gains tax for such funds. The end of the tax break means this market is in decline, at least temporarily. Retail investors, in particular, are redeeming and switching to new products, often offshore equity funds marketed by global fund houses.

The international business division at KITMC runs about $2 billion of the firm's assets under management, of which 90% is from locally domiciled, international equity funds. Suh expects alternative investments to become a bigger part of the business, as is taking place at other institutions such as state investment entity Korea Investment Corporation.

Before the financial crisis, in early 2007, the Korean investment universe had as much as $2 billion allocated to hedge funds, he says. That amount has been severely cut, and is just now starting to recover. Today, Korean investors as a whole have around $400 million invested in hedge funds, Suh estimates.

He thinks the industry could return to $2 billion in the next two or three years. "The financial crisis is over, and it's time for investors to take on more risk," Suh says. "The yield on government bonds is too low, and many investors are not bullish on equities. Some institutions are starting to look at hedge funds again."

KITMC can provide services to these investors either onshore or offshore.

Onshore, it is already supplying private placements to institutions, creating a customised portfolio for them. This has until now been a simple business model, but KITMC is investing in its own quantitative models and due-diligence processes to provide a more robust service. It is also keen to work with more global hedge funds or a fund-of-funds firm to deliver different ideas to its clients.

If the government eases rules on onshore hedge funds to allow the creation of a retail market, KITMC would also be interested in establishing its own hedge-fund or fund-of-funds capabilities to service those investors.

Suh is confident KITMC can win more of this business, because most global fund-of-hedge-fund providers are not licensed and registered onshore, and therefore need to tap Korean investors through a local partner such as KITMC.

Another way to tap demand for alternatives is to set up a fund-of-funds platform offshore, in a place like Singapore or Hong Kong, and develop an in-house track record. KITMC and other Korean financial institutions set up such offshore platforms in 2007, but none of them succeeded, falling victim to the financial crisis and evaporating investor appetite.

KITMC has not yet finalised plans, but is considering the pros and cons of setting up an offshore platform.