[ASK 2019 SUMMIT Panel Talks] Korean LPs call for more hedge fund communications

Korea Post and Kyobo Life Insurance Co. Ltd., the third-largest life insurer in South Korea, remain cautious about increasing exposure to hedge funds, citing a lack of transparency and communications of hedge funds, with key South Korean limited partners moving to a defensive stance for investment assets.

Their stance is in contrast to that of the National Pension Service (NPS) and Korea Investment Corporation (KIC). NPS is set to make its first direct investment in hedge funds by committing $2 billion to single-manager hedge funds, with KIC preparing to boost hedge fund investment again in three years.

For multi-asset funds, Citibank Korea is seeking to use foreign exchange volatility aggressively to create extra returns for its ultra-high net worth clients.

The following are key remarks by senior officials of South Korea's four institutional investors during a panel session of the ASK 2019 Hedge Fund & Multi Asset Summit in Seoul on May 16.

▶ Korea Post’s savings bureau (Myung Hwan Hong, deputy director of alternative investment division):

“We invest in hedge funds to achieve portfolio diversification and stability.”

“Our hedge fund portfolio is worth around 750 billion won ($629 million), representing 1% of total assets. We invest mainly in developed markets, but have no regional quotas.”

“We commit an average $40 million to private investment funds. We target high single digit rates (of returns).”

“Given the lack of hedge funds transparency, we can enhance understanding and trust through active communication. When investing in hedge funds, we believe that we are trust-based partners.”

▶ Kyobo Life Insurance (Minsang Kam, senior manager):

“Our hedge fund portfolio is worth around 200 billion won. We invest mainly in developed markets via funds of funds advised by a US hedge fund manager. Our target return is 6%.”

“Our minimum ticket size is 20 billion won to 50 billion won. We use both core and opportunistic strategies. We manage volatility to 5% or less per year. One senior and one junior member manage the portfolio.”

“Life insurance companies do not like hedge fund assets. Because of the change in accounting standards, equity capital requirements (for hedge fund investment) have increased. We are cautious about expanding hedge fund exposure, but in the low interest environment we have reached an internal decision to maintain our hedge fund exposure.”

“Although new strategies using machine learning and algorithms have been introduced, hedge funds are lacking in communications to persuade institutional investors."

"Despite their absolute return increase, such a problem would be difficult to solve in the near term. Therefore, it seems difficult for local institutions to invest in hedge funds aggressively, despite their growth potential.”

“We rebalanced portfolio in response to sharp falls in traditional asset prices in the second half of last year. We decided not to worry much about beta risk and switched to conservative strategy to earn steady interest incomes.”

“We think volatility will increase again after the second half of this year and investment returns on key assets will decline.”

▶ Korea Scientists & Engineers Mutual-aid Association (SEMA; Changheon Shin, senior portfolio manager):

“Our multi-asset strategy investment is worth around $300 million, representing 6% of our total assets.”

“With returns on all the existing asset classes down, FX seemed to have become an alpha source since last year. Everybody started to treat FX independently to earn additional returns.”

“We will put more focus on risk management (than seeking to maximize returns). To reduce risk factors, we will adopt the competition system whereby we cross-check new fund proposals with the existing fund managers (to which SEMA gave a mandate).”

▶ Citibank (Jinhee Suh, wealth management department head):

“We invest 30 to 40% of our client portfolios in multi-asset and hedge funds. Because multi-asset strategy is important for high net worth clients, we will continue to increase our exposure to them.”

“Ultra-high net worth clients place emphasis on portfolio diversification. We prefer a more dynamic asset allocation and recently rolled out such products. We are seriously considering using ETFs and REITs because they are easy to cash out.”

“We do not plan to make a drastic change to our product portfolio. We will focus on two strategies, maintaining our current investment direction. One is FX. We are preparing to use FX volatility aggressively without hedging. There is huge demand for such a strategy among ultra-high net worth individuals. We are considering making FX-related investment via funds. Second, we will use EMPs (ETF managed portfolios) aggressively as a defensive strategy this year.”

By Jin Seong Kim

jskim1028@hankyung.com