Korean hedge funds face challenges attracting assets

Dec 13, 2011

The country’s financial regulator has approved 13 firms to run hedge funds, but the current environment is hardly ideal for raising capital.

South Korea’s Financial Supervisory Council (FSC) has issued licences allowing 13 local asset management companies (AMCs) to start conducting hedge fund business from this month.

The list is as follows: Allianz Global Investors, Hanwha AMC, KB AMC, KDB AMC, Korea Investment Management, Kyobo Axa Investment Managers, Mirae Asset Global Investments, Mirae Asset Maps Global Investments, Samsung AMC, Shinhan BNP Paribas AMC, UBS Hana AMC, Tong Yang AMC and Woori AMC.

At least nine of them will launch ‘home-grown’ hedge funds in December. The total target amount in these funds is expected to be about $450 million, with $90 million each from Mirae Asset and Shinhan BNP Paribas. Samsung, Korea IM and Hanwha are expected to raise at least $45 million each.

Those who wish to launch a hedge fund must complete the registration process by December 23.

The Korean funds market has stagnated since the market boom up to the first half of 2008, and it now needs absolute-return investment opportunities, says one local media report. As such, there should be strong demand for Korean hedge funds, due to the diversification they can provide.

However, professionals point out some potential issues. Most importantly, Korean asset managers do not appear to have enough investment managers qualified to run hedge fund strategies. Moreover, the first hedge funds will need to perform successfully if they are to attract investors, and that will be a big challenge, given the inexperience and narrow investment opportunities in the market.

To be eligible for a licence, an AMC must have at least W10 trillion (about $9 billion) in assets under management and 15 local managers. Two fund houses, ING and NH-CA, chose not to apply this time, although the latter is planning to launch a fund of hedge funds in cooperation with French fund house Amundi, with which it has partnered on a similar product in the past.

Given high demand from clients, the Korean hedge fund market at the early stage will be about W2.5 trillion, says a Kyobo Axa Investment Managers report. W1.5 trillion of that will come from institutional investors and W1 trillion from high-net-worth individuals. Full-scale development of the hedge fund market is expected once firms have established track records.

Moreover, local securities and investment advisory companies are expected to be allowed to launch hedge funds in the first half of 2012. Conservative estimates of the new industry suggest it will ultimately hit $40 billion, says one market expert.

There tends to be a narrow range of hedge fund strategies used in Korea, so the new funds are expected to use four investment strategies: local equity long/short, Asian equity, Asian bonds and event driven.

The FSC has stipulated that AMCs cannot invest more than 10% of their own capital in each of their own hedge funds or more than 50% of their capital across all the hedge funds they launch.

In the case of funds of hedge funds, the minimum investment amount is about $90,000, and the fund must have at least five underlying managers/funds. Hedge fund portfolio managers are not allowed to invest in their own hedge funds. Investors must be able to redeem at least quarterly.