South Korea is rapidly gaining momentum as a source of capital for hedge funds. Spearheaded by industry pioneers such as the sovereign wealth fund Korea Investment Corporation, the pool of investors from the republic that are either currently invested in hedge funds or are planning to take their first steps in the asset class has grown phenomenally, with Preqin’s Hedge Fund Investor Profiles showing a 70% growth in the investor pool since December 2013.
Insurance companies are the leading group of institutional investors within the country, making up 26% of the investor pool. This is followed by public pension funds (20%) and funds of hedge funds (17%).
Looking forward, pension funds and the asset managers that serve them are likely to play a bigger role as sources of investor capital, as the government continues to mull reforms to mitigate concerns about the country’s pension system’s ability to support an ageing population.
In an effort to address concerns about declining yield, the government made a proposal last year that will allow pension funds to allocate more capital to riskier assets, with the allowance raised from 40% to 70% of their total assets. This creates the potential for South Korean pension funds to consider a wider scope of investments for their portfolios, including hedge funds.
Other proposals include an effort to increase coverage, which entails a proposal that large companies within the country with more than 300 employees are required to manage a pension plan for their employees by 2016.
As the majority of institutions are new investors in hedge funds, South Korea-based investors are relatively cautious and conservative investors when compared to their global peers. The majority of the investors in South Korea will not consider providing seed capital (78%), investing with spin-off managers (76%) or emerging managers (68%).
In terms of strategy, long/short equity is the most preferred strategy by investors in South Korea (63% of South Korea-based investors state long/short equity as a preference). This is followed by event driven (47%) and multi-strategy (43%). Sixty-one percent of South Korea-based investors prefer to have a global approach, followed by funds focused on Asia Pacific (30%) and North America (26%).
Preqin’s Fund Searches and Mandates module shows that 17% of all South Korea-based investors are actively looking to make new hedge fund investments. South Korea’s largest pension fund, the National Pension Service (NPS), is poised to lead the way, as it is looking to invest in an overseas-based hedge fund for the first time in 2015.
As the country’s institutional investor base continues to evolve, fund managers will do well to keep an eye on the republic in order to capitalize on the growing pool of capital being invested in the asset class from this corner of the globe.