A hunt for yield is prompting South Korean investors to pile tens of billions of dollars into unconventional assets abroad, raising risks of losses on unfamiliar strategies.
Holdings of overseas alternative assets such as real estate, infrastructure, private equity and debt, and hedge funds by investors in Asia's fourth-largest economy rose to at least about 201 trillion won ($173 billion) this year, a record, according to data compiled by Samsung Securities Co. and Korea Investors Service Inc. That compares with 158 trillion won held by fund managers, pension funds, insurers and brokerages at the end of 2018 and 118 trillion won in 2017.
South Korean investors are joining peers around the world in putting more money in alternative assets as equity and bond returns sag. The global amount of such strategies under management has risen more than three-fold over the past decade to $9.5 trillion in 2018, and it's forecast to grow to $14 trillion in 2023, according to Preqin data. The assets can expose buyers to bigger risks than conventional securities, because they are often less liquid with less information about them available to the public.
Some signs of trouble are already emerging.
An Australia real estate fund sold by KB Securities Co. is trying to retrieve its investments after a dispute with a local partner, according to a spokeswoman at the brokerage. Institutional investors put 236 billion won in the fund and retail investors parked 90.4 billion won in it.
Some derivative-linked securities tied to a German real estate fund sold by Shinhan Investment Corp. extended their maturities because of problems with the underlying assets, a Shinhan spokesman said. About 380 billion won of such securities were sold.
Lime Asset Management Co., Korea's biggest hedge fund firm, said last month it had frozen $710 million in withdrawals from its funds, some of which invested in collateralized loan obligations repackaging trade finance assets.
Korean brokerages have more overseas alternative assets on their books that they haven't been able to sell, and that could pose risks for them, a local ratings firm warned in September. Unsold assets that big brokerages have held for more than six months jumped to 1.3 trillion won at the end of June from about 500 billion won in 2018.
"We should learn from those examples and set up an adequate process to mitigate risks," said Andy Kim, a credit analyst at Samsung Securities. "Selecting asset classes is getting more important among alternative assets due to fierce competition for the products and high valuations."
Mr. Kim expects demand for infrastructure investment to rise further and recommended 5G facilities and European renewable energy projects because those assets are less affected by swings in the economic cycle.
South Korean institutions need to boost returns on their investments to help provide for an aging population, and the national pension fund has 708 trillion won in assets. But with a global economic slowdown and sliding interest rates dragging down returns, there are signs that some investors have grown less cautious when opportunities to earn extra yield arise.
Lee Do-yoon, chief investment officer at the Police Mutual Aid Association in Seoul, said that his staff recently suggested that the fund invest in a power plant in New York state because the potential return was high.
"I asked him if he visited the site or if he even knew where the plant was located exactly, and he said no," said Mr. Lee, whose organization oversees about 2.6 trillion won in assets. Mr. Lee rejected the proposal.
Mr. Lee said he doesn't think all alternative investments are bad but that fund managers should avoid indiscriminate investment in unfamiliar assets. He said it's "just nonsense" that funds that avoid junk-rated bonds have no objections to putting their money in direct lending with no credit ratings because it's considered an alternative investment.