Korea’s Poba lifts hedge fund investments

Korean Institutional investors are turning to hedge funds as alternative asset prices increase, reducing the illiquidity premium normally enjoyed by longer-term investors.

The latest to make the move is Korea’s Public Officials Benefit Association (Poba), one of the leaders in alternatives investing in the region, which has more than 50% of its assets under management (AUM) in alternative assets.

“This year up to now we have increased [our hedge fund allocation by] about $60 million,” Jang Dong-hun, chief investment officer at Poba, told AsianInvestor.

Higher alternative asset prices have made liquidity a key concern for the Korean pension fund, Jang said on a panel at the AsianInvestor Asian Investment Summit on May 31, and Poba has explored more liquid alternatives as a result.

The pension fund has also allocated around $70 million to $80 million to US-listed real estate investment trusts (Reits) and it intends to add to its hedge fund allocation before the end of this year.

“[In the] second half of this year we have a plan to add some more. This year our plan is altogether about $100 million,” Jang said in a phone interview after the event.

All $100 million will be invested in overseas hedge funds and Poba expects to get a return of about 5% to 6% from its hedge funds investments, he said.

KOREAN AND GLOBAL TRENDS

Market volatility is another factor pushing Korean institutional investors towards hedge funds, an area that has traditionally been given a wide berth by asset owners in Korea.

For example, Korea Post Insurance (KPI) announced a mandate in April 2018 for overseas hedge fund managers or financial institutions to oversee an additional 50% allocation to its hedge fund investment pool, increasing the investment pool to $280 million.

In 2017, the average allocation to hedge funds by Korean institutional investors was 2.5% and total AUM was $1.55 trillion, according to alternative assets data provider Preqin. However, the average allocation increased slightly in the first quarter of 2018, to 2.6%, and hedge fund AUM grew to $1.65 trillion.

Poba’s hedge fund allocation at the end of 2017 was slightly above average among Korean institutional investors, though still only at 4% of its overall AUM total of $11 billion, Jang said. Even so, the extra $100 million planned for 2018 represents an increase in hedge fund AUM of almost a quarter.

Currently, Poba's hedge fund investments are evenly split between domestic and overseas hedge funds, but it plans on reducing its investments in domestic hedge funds.

Korean hedge fund mandates had the second-lowest returns in the Asia-Pacific region in 2017, as well as the lowest 3-year and 5-year annualised returns, according to a February report by hedge funds data provider Eurekahedge.

Globally institutional investors are increasingly embracing hedge funds in search of alternative yield, a January survey by BlackRock showed, with 20% of institutions saying they planned on increasing allocations to hedge funds, compared with 17% the previous year.

Japan Post Bank said in December that it planned to increase its $7 billion allocation to alternatives -- of which about half is invested in hedge funds -- by a factor of almost 10.

Asian high-net-worth investors have also shown a growing interest in hedge funds, given heightened levels of market volatility and a desire to diversify and protect their investments.

HEDGE FUND STRATEGIES

For domestic hedge fund mandates Poba is mainly using equity long/short strategies, Jang said, while its overseas hedge fund mandates are in the hands of external fund-of-hedge-fund managers.

The equity long/short strategy is less affected by market movements and so is more attractive to Korea's institutional investors as volatility increases, while fund-of-hedge-fund strategies appeal to smaller investors, Elizabeth Oh, head of investments advisory for Korea at Mercer, told AsianInvestor in April.

In addition to allocating to hedge funds, Poba told AsianInvestor in December 2017 that the pension fund was also looking to diversify its alternatives-heavy portfolio into private debt, mezzanine and debt investments in real estate and infrastructure, and private equity.