Korea's NPS to make first hedge fund foray

Korea’s National Pension Service (NPS) announced plans to make its first investment into hedge funds before the end of this year after eight years studying the asset class.

An official from NPS’ investment committee confirmed that hedge fund approval had been granted late last week.

It comes as NPS strives to diversify its $430 billion portfolio into non-traditional securities and overseas assets. Nine of the world’s top 10 hedge fund investors are national pension funds (including from Canada, Norway and the Netherlands), and sovereign wealth funds.

“Hedge fund investments will be executed from as early as the end of this year,” the official told local media. “A hedge fund is an investment vehicle that invests in traditional securities such as stocks and bonds to achieve broader diversification.

“Hedge fund investments will diversify the risks of the entire pension fund’s portfolio and as such will contribute to its reliable stream of returns in future. This strategy is expected to strengthen the whole spectrum of NPS’ investment capabilities.”

NPS’ fund management committee has limited the amount it can invest in hedge funds initially to 0.5% of its entire portfolio, which amounts to about $2 billion.

The decision was taken on February 26 and announced the following day. It has been under consideration by the health and welfare ministry – which oversees all NPS functions – for more than three years.

It is understood that NPS first began exploring hedge funds as a potential investment opportunity as early as 2007, although plans were put on hold after the global financial crisis the following year. It means plans have taken eight years to come to fruition.

An advisor to NPS told AsianInvestor that initially it would invest into overseas funds of hedge funds before gradually expanding into single hedge funds and multi-strategy. It is expected to look at developed market opportunities to begin with.

The official added that NPS recognised Korea’s hedge fund industry was still nascent and undeveloped, but said it would eventually look to back domestic players as well.

NPS stated that due diligence on hedge fund managers would be mandatory, while the level of risk inherent in each manager would be verified independently by external parties.

NPS’ assets under management are projected to reach $900 billion by 2022. It has set out to raise its portion of overseas investments to at least 25% of total AUM by 2019, from 20% at the end of last year. That should see its proportion of overseas exposures more than double from about $80 billion as of June last year.

Separately, NPS announced it had achieved an investment return of 5.25% last year, up from 4.13% in 2013. It means NPS has delivered an average five-year return of 5.64% since 2010 and a 10-year average return of 5.67% since 2005.