South Korean hedge fund performance bucking the trend

The South Korean hedge fund industry is delivering decent performance and witnessing an increase in Assets under Management (AuM), in contrast to global trends.

By Editorial
The South Korean hedge fund industry is delivering decent performance and witnessing an increase in Assets under Management (AuM), in contrast to global trends.

Data from Preqin found that South Korea-focused hedge funds generated gains of 3.18% over the last 12 months compared to 0.18% for Asia-Pacific (APAC) hedge funds more broadly. Year-to-date (YTD) performance for 2016 has been just over 1% at South Korean hedge funds whereas APAC managers more broadly nursed losses of 3%, according to the Preqin figures.

Shinhan Investment Corporation said South Korean hedge fund AuM had increased by $950 million to $3.56 billion in 10 months, and the number of funds had grown from 46 to 78. This growth comes as Korean investors look to diversify their investment portfolios beyond traditional asset classes. The Korean investor market is sizeable and has approximately $1.48 trillion in assets.

“The South Korean investor market is exciting and could be a lucrative source of capital for hedge funds in the country or those wanting to build a presence in the country. Our data indicates that a number of pension funds, insurance companies, banks and corporates have cash to deploy, and are looking for investment opportunities. Hedge funds could therefore stand to benefit, particularly those running long/short equity strategies,” commented Amy Bensted, head of hedge fund data at Preqin.

Regulation has also made it more straightforward for hedge funds in South Korea. The Capital Market Consolidation Act – enacted several years ago – made it simpler for firms to set up domestic investment vehicles. Regulators in South Korea have been working with the industry to develop a friendlier regime for hedge funds over the last few years.

In October 2015, the country further eased restrictions around hedge funds making it easier for firms to obtain licenses. It has also made the hedge fund launch process more straightforward and reduced the minimum subscription rate for high-net-worth-individuals to 100 million Won ($84.3 million) from 500 million Won ($421 million).

Whether this will make a material impact is open to debate. Korean investors tend to have a bias towards real estate and private equity, and there has been a longstanding hostility to hedge funds ever since the 1998 Asian financial crisis.
“I believe HNWIs will increasingly invest into Korean hedge funds. The HNWI investor base is typically an early adopter of hedge funds in markets such as North America and Europe and have remained an enthusiastic supporter of hedge funds as the industry in these regions develop. I suspect Korea will follow a similar path,” said Bensted.

Foreign hedge funds are taking note too. Skybridge Alternatives, a $13 billion fund of hedge funds (FOHF) announced it would establish an office in Seoul to take advantage of the changing investor attitudes towards hedge funds in the country. The Korea National Pension Service (NPS), which controls roughly $440 billion recently started allocating into hedge funds, and some believe this could precipitate further investments by other – perhaps smaller – schemes. At present, NPS invests 0.5% or $2.2 billion into hedge funds although this could increase dramatically.

A number of countries within APAC are increasingly boosting their hedge fund industries. One of the more interesting markets is China. Z-Ben Advisors, a China-based consultancy, said there were now 3,500 onshore Chinese hedge funds running $97 billion, or three times what they were in 2013. This came shortly after the China Securities Regulatory Commission (CSRC) required onshore Chinese private funds available to qualified investors – also known as “sunshine funds” – to register. This regulatory decision has given legitimacy to the Chinese onshore industry.

Foreign hedge fund managers have also been given a limited scope to run money on behalf of HNWIs in Shanghai following rule changes introduced in 2013. The Qualified Domestic Limited Partnership Programme (QDLP) enables hedge funds to manage restricted amounts of capital on behalf of Shanghai HNWIs. No hedge fund can raise more than $50 million. While a handful of managers have hit that threshold, several have yet to do so. The high subscription threshold of $500,000 is certainly a deterrent to many Chinese HNWIs, who may not have experience of foreign asset managers or hedge funds.

Several hedge funds including Winton, Man Group and Och-Ziff established a Chinese presence following QDLP. Other fund managers including UBS Asset Management, Nomura Asset Management and Deutsche Bank Asset and Wealth Management have obtained QDLP licenses.

The core challenge of setting up in China is that success is not guaranteed, and it can be very costly to navigate the regulations, particularly as firms are not allowed to raise huge sums of money. However, those managers point out that the rewards of being an early stage mover in China could be significant.

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