Korean investors learn from hedge fund hangover

Institutions such as Hanwha Life and the Military Mutual Aid Association say bad experiences from the 2008 crisis have led them to diversify alternatives exposure and be more collaborative.
Korean investors learn from hedge fund hangover

A lingering hangover from investing in hedge funds before the 2008 global financial crash has driven Korean institutions to diversify their alternatives exposure and be more collaborative, an AsianInvestor forum heard.

Kevin Hur, head of alternative investments at Hanwha Life, noted that of the firm’s W100 trillion ($84.2 billion) in assets, about W11 trillion was invested in alternatives. Of that sum, less than W3 trillion is put to work overseas, he told the ninth annual Korea Institutional Investment Forum in Seoul earlier this month.

Prior to the global financial crisis the firm was active in alternatives internationally and invested more than W600 billion in hedge funds, said Hur, but implosion in the asset class had left bad memories.

“We are limited in our engagement with legacy [hedge] funds. We have no new projects,” he revealed, pointing out the firm has since become more conservative.

Hanwha Life’s alternative investment business effectively shut down for three years post-2008, when it dismantled its overseas investment team.

While the firm has restarted its overseas programme with a handful of staff, Hur suggested it had missed an opportunity to keep people with experience of international markets in-house.

“As we go about alternative investment, there is no text book or school to show us how to do it,” he reflected.

Hur noted that while Hanwha Life had tended to compete with its domestic institutional peers for alternative investments in the past, there was now a more collaborative approach.

“We are working together,” he told the forum. “For the last three years we have used a lot of external people and we have been pushing for more external training sessions.”

The insurer now prioritises stable, cash-flow-generating assets such as real estate and infrastructure, having established a consortium to invest in buildings in London, Paris and New York. It also invests in private equity.

If Hanwha Life were to restart its hedge fund investment programme, it would be more likely to take a fund-of-funds approach, said Hur, arguing that high watermarks, fee structures and lack of transparency are burdensome. “We want to understand what the underlying assets are,” he added.

Jerry Yeo, deputy general manager at Dongbu Fire Insurance, said that of the firm’s W25 trillion in assets, more than 25%, or W6.5 trillion, was invested in alternatives.

Dongbu, too, had invested in single hedge fund strategies prior to the 2008 crash, but Yeo conceded its portfolio was not sufficiently diversified at that time.

In 2010 the firm adopted a more diversified approach to investing in hedge funds, using third parties to monitor the universe.

At the same time Dongbu has focused on generating a steady cash stream from its alternatives exposure – notably in property, infrastructure and shipping – and has ventured into direct lending.

“We plan to increase exposure to real estate and infrastructure,” Yeo said. “We want to be invested in advanced countries with good, core assets to lengthen maturity.”

Kim Jimwoo, managing director of alternative investment at the Military Mutual Aid Association (MMAA), said the organisation had invested in alternatives since inception in 1984, initially providing housing support to its members.

The leasing of apartment buildings had worked well when the domestic property market was booming, he noted, but the MMAA, which has some $8.5 billion in AUM, had had to learn lessons about the benefits of diversification during times of slowdown and recession.

Not only has the institution now structured a real estate portfolio incorporating international exposure to offset concentration risk, but it has also added private equity, infrastructure, hedge funds and private debt.

“We are trying to produce portfolios that are as diverse as possible,” Kim said.

MMAA capitalised on opportunities in private debt in the wake of the 2008 crisis, he noted, and in 2012 formed a club with other institutions to invest internationally to benefit from the US economic recovery.

“If you look at MMAA’s investment strategies and tactics, we will continue to expand in alternatives,” he pledged, mentioning mezzanine and private debt, private equity and hedge funds.

Certain asset managers have responded to the return of domestic institutions’ interest in hedge funds.

Suh Jungdoo, managing director in the beta and global investment division of Korea Investment Management, said the firm provided hedge fund advisory to 12 domestic institutions, managing portfolios amounting to W1.7 trillion.

The fund house focuses not only on hedge fund performance and portfolio structuring, but also education about the asset class, which Suh described as more accessible than other alternative vehicles.

Hedge fund fees have become negotiable and transparency has improved to a degree, he noted. “There is a lot of information available now, but it is not 100%.”

Korea IM also has a presence in New York focused on hedge fund research and is looking to win business from Korea’s National Pension Service, which is set to invest in the global hedge fund universe, as reported.

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