Hedge fund investments have gained momentum in South Korea since 2009, when the South Korean government began to permit hedge fund operations within the country.
In an effort to diversify their investment portfolios, a number of South Korea-based investors are seeking exposure to the asset class. Preqin’s Hedge Fund Investor Profiles database shows that South Korea-based investors in hedge funds manage a total of $927bn in assets. Insurance companies make up the largest investor type in South Korea (33%), followed by public pension funds (24%) and investment banks (10%).
Geographically, most South Korea-based hedge fund investors look to gain global exposure to the hedge fund asset class. Fifty-two percent of these hedge fund investors in South Korea also prefer to invest in the regional Asian market, while 30% are willing to consider investment opportunities in both Europe and North America. In terms of fund strategy, long/short equity funds represent the most attractive vehicle for South Korean hedge fund investors, with 43% of investors expressing an interest in this strategy. The next three most popular strategies employed are CTA (33%), macro (30%) and multi-strategy (30%) vehicles.
The hedge fund market in South Korea is still in the early stages of its development. South Korea-based institutional investors are less active in the hedge fund space compared to their counterparts in the wider Asia region. By comparison, South Korea-based investors allocate an average of less than 1% of their assets under management to hedge funds, in contrast with an average 10% by those in Hong Kong, Japan, Singapore and Australia. Their cautious sentiment towards the asset class is also reflected by their conservative preferences for hedge fund managers. The majority of South Korea-based investors will not consider investing with emerging and spin off hedge fund managers, with only 25% of investors expressing an interest in the former and 20% in the latter. On average, these investors also require fund managers to possess a minimum track record of four years, with no less than $575mn in assets under management.
Despite such challenges, South Korea’s Financial Service Commission has been stepping up efforts to spur the local hedge fund market since 2011 by relaxing regulations governing the industry. These measures include broadening the range of qualified hedge fund investors, and lowering barriers of entry for prospective hedge fund managers. The financial regulator is confident that these efforts will be able to boost growth in the domestic hedge fund industry. At present, Preqin’s Hedge Fund Investor Profiles database indicates at least 10 institutional investors in South Korea are actively seeking to add new hedge fund allocations to their investment portfolios. These investors, which include asset managers, public pension funds and insurance companies, are looking to invest in a diversified range of hedge fund strategies across global markets.