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  2. ALTERNATIVES
May 02, 2016 01:00 AM

Hedge fund offerings hit a growth spurt in S. Korea

Regulatory shift opens the door for managers

Douglas Appell
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    Kiwook Kim said the lower regulatory hurdles have pushed firms to build up their hedge fund businesses.

    A strong regulatory tailwind is buoying South Korea's nascent hedge fund industry this year, even if the impact on the supply side is outpacing growth in demand just now.

    Market veterans see reason to hope that demand for hedge funds — from institutional and individual investors alike — will catch up.

    An April 26 report by Miji Son, a securities industry sector analyst with Seoul-based Shinhan Investment Corp., noted that 26 licensed hedge fund managers in South Korea were offering 78 funds at the end of March, up from 17 managers and 46 strategies three months earlier.

    The latest number is closer to 30 licensed managers, with “many, many more pending,” said Douglas Hong, chief marketing officer with Seoul-based Quad Investment Management Corp., which oversees 270 billion won ($235 million) in pooled hedge fund vehicles and close to 1.3 trillion won in institutional long/short mandates. (In South Korea, the term “hedge fund” does not include separate accounts, but rather specifically to commingled, pooled hedge fund vehicles.)

    That mushrooming of hedge funds on South Korea's investment landscape followed a significant easing of regulations in October that made it easier for firms to get the licenses needed to offer pooled hedge fund vehicles; eased restrictions on the launch of new funds; and slashed the minimum hedge fund investment for high-net-worth individuals to 100 million won from 500 million won.

    Lower regulatory hurdles and expectations of meager market returns have left “everybody now, from asset management and investment advisory firms to brokerage houses, trying to build up their hedge fund businesses,” said Kiwook Kim, a Seoul-based partner with global executive recruiting firm Heidrick & Struggles.

    As of March 31, less than five years after a regulatory framework for local hedge funds went into effect, pooled hedge fund vehicles in South Korea had a mere 4.1 trillion won in combined assets under management.

    But demand for hedge funds is showing signs of life. Inflows for the first three months of 2016, at 700 billion won, are already approaching the 900 billion won total for all of 2015, Shinhan Investment's Ms. Son noted in her report.

    High-net-worth investors

    Eric Yun, CEO of Seoul-based LK Asset Management Ltd., predicted in an interview that high-net-worth investors could drive growth for South Korea's hedge fund industry in coming years.

    Many investors in equity-linked securities — a product sold over the past decade to South Korean investors as a moderate risk/moderate return option — suffered unexpectedly steep losses when markets plunged at the start of 2016, said Mr. Yun. That could leave them receptive to considering alternatives, he noted.

    LK, which had 42 billion won in long/short managed accounts at the end of 2015, got its hedge fund license in December and quickly launched two hedge funds. Mr. Yun said those funds pulled in 36 billion won between Dec. 22 and mid-April.

    That, and a hefty 28 billion won mandate from a South Korean bank, contributed to a doubling of the firm's AUM since the start of 2016 to 130 billion won, said Mr. Yun, who declined to name the bank client.

    With public pension funds, insurance companies and banks in South Korea all facing low sovereign bond yields and a moribund local stock market, some analysts say institutional allocations are poised to begin climbing as well.

    Shinhan Investment's Ms. Son noted in an e-mail that some of South Korea's biggest public pension funds, including the 520 trillion won National Pension Service and the 15 trillion won Teachers Pension, are mulling initial allocations to foreign hedge fund-of-funds strategies, while others — including the 22 trillion won Korean Teachers Credit Union, the 9.2 trillion won Military Mutual Aid Association and the 8 trillion won Public Officials Benefit Association — already are awarding mandates to South Korean hedge funds.

    The importance those investors place on track records has favored the industry's biggest names, but more recent recipients of licenses — such as Quad, Anda Asset Management and Lime Asset Management — have been able to leverage track records managing long/short strategies, she said.

    In an interview, James Jong-pil Lee, managing director and head of Seoul-based Lime's hedge fund group, said public pension funds and financial institutions already are contributing to the combined 160 billion won of client assets garnered by the seven multistrategy hedge funds Lime launched after obtaining its hedge fund license in December. He declined to name them.

    Quad's Mr. Hong said his firm began managing long/short market neutral strategies from the start of 2011, and got its hedge fund license in October 2014. Quad launched five hedge funds since then, starting with a long/short Korean equity market neutral strategy, followed by a long-biased, global health-care long/short fund and a regional long/short strategy.

    In her April 26 report, Ms. Son said NPS likely will move within a few years to extend mandates to South Korean hedge fund firms, which will be a major driver of industry growth. She said the other major driver will be high-net-worth allocations to hedge fund-of-funds vehicles should regulators — as she anticipates — open the door soon to such investments.

    If that proves prescient, then Samsung Asset Management, South Korea's biggest hedge fund manager with 1.2 trillion won in assets, or 30% of the industry total, could remain ahead of the pack.

    Dongha Kim, Seoul-based senior manager of Samsung Asset Management's hedge fund division, said in an e-mail that Samsung last month launched a partnership with Mesirow Advanced Strategies — a division of Chicago-based Mesirow Financial — aimed at developing SAM's global hedge fund-of-funds management capabilities.

    For the partnership's initial phase, SAM will invest third-party client money in a Mesirow commingled global fund-of-funds strategy, to be broken out eventually as a managed account as the AUM increases. At that point, SAM gradually will take a more active role — with the ultimate goal of SAM directly allocating capital to underlying hedge funds, with advice from Mesirow, said Dongha Kim.

    He said the partnership with Mesirow includes “knowledge sharing” in areas such as the hedge fund-of-funds management process and due diligence.

    While SAM officials anticipate some South Korean high-net-worth investor interest in the SAM-Mesirow fund-of-funds offering, institutional investors are “our main target,” said Dongha Kim.

    He declined to predict when SAM could develop a fully independent hedge fund of funds business, conceding it will take “huge” commitments of time and resources to develop the kind of sophisticated research process and advanced management skills of a Mesirow.

    Broader partnership

    Muj Ali, Mesirow's Hong Kong-based managing director, Asia-Pacific, in an interview called the tie-up with SAM the beginning of a broader partnership that eventually could include other areas of cooperation in the region.

    Meanwhile, Mr. Kim said SAM, with its goal of being “the Asian top-tier hedge fund house,” is also pushing ahead with its direct hedge fund program.

    While the Korean equity long/short strategy it launched in December 2011 accounts for almost 80% of its 1.2 trillion won in hedge fund assets now, with the rest in a fixed-income relative value strategy launched in 2012, SAM will push to add a global macro fund and an Asian active long/short fund later this year, said Dongha Kim.

    Ms. Son noted in her report that diversification from a long/short-heavy lineup is an industry theme now, with the weight of that category dropping to less than 50% now from 70% of South Korean hedge funds nine months ago.

    Dongha Kim said pension funds and foundations account for 14% of SAM's hedge fund assets, a fraction of the 57% coming from institutions such as banks and insurance companies, and the 29% coming from high-net-worth individuals. But he said SAM expects allocations from pension funds and foundations to become a bigger piece of the pie.

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