First public hedge fund product readied in Korea

Korea's retail investors will soon have an opportunity to invest in a hedge fund product. Citibank plans to distribute a product managed by Samsung Investment Trust Management Company based on Chicago-based Hedge Fund Research's global index. To date, hedge funds have only been available in Korea on a private placement basis.

Last year's Asset Management Business Act allowed onshore fund products to include derivatives against stocks, bonds, commodities and indices. That has paved the way for innovative products that are now making their way through the pipeline.

Um Tae-jong, CIO and COO for global products and investments at Samsung ITMC, says his team will provide an absolute-return international equity strategy based on Hedge Fund Research's investible index of global hedge funds.

"We consider this an equity-type fund, so there won't be strong demand," Um says. The onshore Korean unit trust industry's assets are mainly in money market and bond funds, and only 5% of total assets are invested in equity funds. "And this won't appeal to institutional investors, which have more options. But Citibank carefully targets high-net worth clients, and can reliably place around W100 million."

Kim Yong-tae, Citibank's director of wealth management in Seoul, says hedge funds have a negative image because they're seen as culprits behind the IMF crisis in 1998. But if they are structured well, they can become a significant asset class. Hence the decision to go with a hedge fund index.

Hedge Fund Research's HFRX Global Hedge Fund Index returned 13.39% in 2003. It covers eight strategies and can invest in over 1,500 hedge funds in its database. With an average annual return of around 8% and volatility ranging from 4-13%, Citibank feels this is attractive to upscale retail investors in Korea.

The fund's launch has been delayed, however. Slated for this month, it will probably appear in July or August. The Financial Supervisory Service's funds unit experienced turnover and the new set of regulators dispute whether this product constitutes a fund, or an index. The new AMBA law says onshore funds can include derivatives against an index, but doesn't say anything about a fund. The regulators are said to be clarifying the law to allow for derivatives against a fund.

Samsung ITMC plans to roll out two more hedge fund products this year, including a commodity index fund and a managed futures fund of hedge funds.