ILS funds of funds attract Korean high net-worth individuals

Funds of funds (FoFs) investing in insurance-linked securities (ILS) funds have been luring yield-hungry wealthy South Koreans, with domestic brokerage houses unveiling relevant products since late last year.

NH Investment & Securities Co. Ltd. is marketing private FOFs based on ILS funds of Leadenhall Capital Partners LLP, a top ILS investment manager, through its private banking centers. The FoFs, fully currency hedged, were launched by a South Korean asset manager, HeungKuk Asset Management Co. Ltd., for a total amount of about 50 billion won ($44 million), according to the securities industry sources on March 16.

Daishin Securities Co. Ltd. has attracted about 10 billion won for two ILS FoFs from retail investors so far this year, which also invest in Leadenhall Capital’s ILS funds.

The ILS FoFs launched in the country are currency hedged, excluding the latest one marketed by Daishin Securities which allows individuals to invest with dollars.

ILS was just introduced in South Korea last year, after the Public Officials Benefit Association (POBA) commit a total of $40 million to LGT Capital Management, Leadenhall Capital Partners and Nephila Capital to invest in catastrophe bonds, or cat bonds.

“They were originally developed and marketed as products for institutional investors,” said Tae-jong Byeon, head of Heungkuk Asset Management’s product development team, referring to its ILS FoFs marketed by NH Investment. “With growth in the private fund market, demand for retail alternative investment products is increasing.”

Globally, the ILS market has grown rapidly to about $75 billion in terms of invested capital at end-June 2016, since first issued in 1995.

ILS products emerged as an attractive alternative asset in the low interest rate era since 2012 because of their low correlation with other investment assets and stable returns. They delivered an average annual return of 8.1% between 2005 and 2016, based on cat bond indices.

Insurance companies issue ILS to pass on insurance risks to investors in return for paying part of  premiums they receive from policy holders. ILS include catastrophe bonds, collateralized reinsurance investments and industry loss warrants. Cat bonds, which securitize insurance policies to protect against natural catastrophes, are the most commonly traded ILS products.

Still, the risks of principal losses and high management and brokering fees of ILS FoFs could remain a drag on the market.

“Wealthy customers also invest (in ILS FoFs) as a part of their portfolios for balanced asset allocation,” said a a local brokerage’s private banking official. 

Meanwhile, Korea Post announced a request for proposals earlier this month to invest about 100 billion won in ILS.

POBA, a $8 billion retirement fund for South Korean government employees, is considering selecting global asset managers to invest in cat bonds in the second half of this year.

By Hyunjin Lee

apple@hankyung.com