Chalkstream Capital Group LP is betting that South Korea will be its next best source of alpha.
Interest from large North American asset owners in the firm's new Korea hedge fund strategy is running high, with a contingent of potential investors traveling there with Chalkstream executives for site visits later this month.
The New York-based alternatives manager was launched in 2003 as a family office to exploit investment niches across asset classes that are “less crowded, inefficient, uncorrelated and where we can generate alpha,” said Andrew K. Tsai, Chalkstream's managing principal and chief investment officer.
After a decade of exploiting diverse investment opportunities in areas like short credit, distressed mortgages and long/short Japanese equity and credit securities, the firm's interest in South Korea was sparked in 2013 by a co-investment deal.
Chalkstream manages $700 million, about half of which is from North American institutional investors and the balance is from ultra high-net-worth individuals, particularly hedge fund managers who are looking to diversify their investments outside their own strategies, Mr. Tsai said.
Further research convinced Chalkstream portfolio managers that the country's broad stock market, dominated by passive institutional and retail domestic investors and few foreign investors — very like that of the U.S. equity market in the 1970s — offers abundant opportunity for an institutional hedge fund strategy on both the long and short side.
Another attractive feature is the lack of hedge fund competition.
Korea's own hedge fund industry is in its infancy, as regulations permitting the establishment of hedge funds were adopted in 2011. Korean-based hedge funds managed a total of just $5 billion as of March 31, according to data from industry researcher Preqin Ltd., London.
Chalkstream has first-mover advantage as one of the first non-Korean companies to be licensed to trade Korean equities, Mr. Tsai said during an interview in Pensions & Investments' Chicago office.
“Investing in Korea is an easy concept to embrace, but hard to do on the ground,” Mr. Tsai said. It took a collective 320,000 air miles over 10 trips involving 300 hours of meetings, before Chalkstream selected three in-country investment partners.
One Korean firm offers a traditional long/short equity, market neutral hedge fund strategy. Because the Chalkstream Korea hedge fund strategy is long-biased and designed to take advantage of a narrowing spread between Korean preferred shares (long) and common shares, the other two managers are long-only specialists. One is a value-oriented, event-driven/special-situations manager and the other is a classic value equity manager that runs concentrated portfolios.
Chalkstream is the first foreign investor and will be the exclusive source of non-Korean investors, including North American institutional investors, for each of the three Seoul-based partners. Mr. Tsai declined to name Chalkstream's Korean underlying managers for competitive reasons and because they are not registered in the U.S.
As for the investment premise, South Korea is an “orphan country” among Asian nations that few foreign investors look at and when they do, misconception abounds, said Mr. Tsai. He noted that even index providers can't agree whether the country belongs in their developed or emerging markets indexes.
“No one is looking at Korea,” which makes it a tantalizingly untouched market, Mr. Tsai said.
Among the truths about Korea's investment potential that Mr. Tsai identified:
- Most investors don't look beyond Korea's largest names such as Hyundai Motor Group and Samsung Group, but more than 1,800 companies with low valuations are publicly traded;
- The country's asset management industry is dominated by the investment management subsidiaries of corporate and public pension plans that widely favor passive management;
- Sell-side research coverage of Korean companies is very limited, with 75% of stocks either not covered or receiving coverage from only one source;
- Unsophisticated investors predominate in the Korean market with retail investors, especially day traders, accounting for 50% of stock market volume.
“The alpha play for us will be the gap between perception and reality about Korea,” Mr. Tsai said. “We've never seen such a wide-open investment opportunity. We generally find it hard to put as much as $200 million to work in the capacity-constrained niches where we typically see alpha possibilities.”
