Korea’s FSC steps up hedge fund expansion drive
Korea’s Financial Services Commission (FSC) is anticipating strong growth in its fledgling hedge fund industry with institutional investors set to enter the fray in their drive to diversify.
It comes after the regulator moved to lower entry barriers to bulk up an industry that has almost quintupled in size since it took root a little over seven months ago.
Last week, the FSC announced it would slash the required AUM of asset managers eligible to set up hedge funds to W1 trillion ($881 million), a tenth of the previous W10 trillion level.
It will also halve the minimum AUM requirement for securities firms to W500 billion and for investment advisory companies to W250 billion. All regulatory changes are due to come into effect this November.
The FSC says it wants to alleviate the regulatory environment for market participants after the completion of a six-month pilot test period that has largely proved successful.
The industry was initiated in Korea last December with about $130 million invested in 12 hedge funds. But as of July 25 this year that had expanded to $625 million and 19 funds.
Much of the investment entering the industry has come from entities affiliated with the hedge fund managers and prime brokers, and the FSC is eager to alter this.
It says only about $60 million has been invested so far by 110 individuals including non-affiliated institutional investors and high-net-worth individuals, and more are expected to commit capital as the industry matures.
The FSC says it expects life insurers and pension funds to start investing more seriously in the second half of this year now that the hedge funds have accumulated a six-month track record.
What is evident is that almost 70% of Korean hedge funds are employing long/short strategies, and the regulator is keen to encourage greater diversity and drive education and training efforts.
To date, nine managers operate domestic long/short strategies and four use global long/short; five use multiple strategies and just one employs arbitrage.
There are now 57 professional hedge fund managers that are active, seven of whom have overseas hedge fund experience. There are also five prime brokers servicing hedge funds.
The regulator says it plans to expand the operational scope of prime brokers to enable them to serve other financial institutions such as pension funds, and to allow hedge funds to work with multiple prime brokers simultaneously.
It will also join in training and education efforts with the Korea Financial Investment Association (Kofia), in collaboration with global hedge fund managers.
One local hedge fund manager, who declined to be named, expects the regulatory changes to help increase the size of the domestic industry, although he expressed doubts that this would happen anytime soon, given the dearth of trained and experienced managers in the country.
Noh Hee Jin, of the Korea Capital Market Institute, also expects a positive market impact from the FSC’s rule changes. “Since Korean pension funds will be allowed to invest in hedge funds, these new policies are appropriate. I believe the local industry will become much stronger.”
He argues that the FSC should further look to lower the minimum investment threshold for high-net-worth individuals into hedge funds, which at present stands at around $435,000. “This should be eased as well to encourage more investment,” he adds.