[ASK 2017 SUMMIT Panel Talks] KIC may pick small hedge fund managers

Korea Investment Corporation (KIC) is looking at small and medium-sized hedge fund managers to take a bigger chunk of a deal, and the sovereign wealth fund is chasing co-investment and investment via separately managed account (SMA) to save fees.

National Pension Service (NPS) will likely look for new managers for new or niche market strategies as the $500 billion pension scheme is shifting focus towards strategic diversity, away from portfolio diversification which had been sought after in the past decade.

When selecting general partners, South Korea’s three largest asset owners – NPS,  KIC and Korea Post – look primarily at whether management firms will stick with their original strategy as they seek long-term partnerships with GPs.

The following are remarks from senior officials of NPS, KIC and Korea Post in panel discussion during the ASK 2017 Summit for Private Debt & Equity and Hedge Fund & Multi-Asset in Seoul on May 17 and 18.

▶KIC

On Hedge Funds (Minjun Kim, deputy director):

“Because the investment capacity we can secure from large management firms is limited, we are looking at small- to medium-sized management firms. We are stepping up risk monitoring, too. Fees, which are higher than their alpha generation, are another problem. We need to be more aggressive in negotiating fees. We are considering using SMA and co-investment to save fees.”

“In my personal opinion, managers with a quick grasp of market flows are likely to be sought after. Special strategies such as distressed, which can make premiums, seem important.”

“On underperforming funds, we need to know the exact reason for the underperformance. After selecting managers carefully, it is important to remain committed to each other and develop into a long-term partnership.”

On Private Debt & Equity (Sungjun Song, director):

“When selecting management firms, we look at whether the manager’s strategy will work out in uncertain market conditions and they invest with consistency, in comparison to their previous funds.”

“For early-stage investment strategy, we look at their deal sourcing, investment stability and performance bonus system. We also look at whether they can contribute to our country’s financial industry development.”

▶NPS

On Hedge Funds (Jun Geun Kim, senior portfolio manager):

“Our internal policy is that we give more to outperforming managers. But we have not set up such a policy for hedge funds yet.”

“We may need to keep studying GPs not only about their returns, but how their company is being operated. So we can establish the logic that we can invest even at the time when they are underperforming.”

On Private Debt & Equity (Hyung Don Choe, head of global private equity):

“We are working with around 50 general managers for 120 investment cases. We have achieved diversification to some extent. We are now focusing on developing relationships with GPs.”

“When we look at management firms, we focus on whether they will continue to use their original strategy, value-creation strategy. We also look at their pricing policy and whether they have a long enough time for due diligence.”

“For global buyout strategy, we may select new managers after our relationships with the current managers end. For specific sectors and new and niche market strategies, we will select new managers.”

▶Korea Post

On Hedge Funds (SukeJun Yun, deputy director):

“Unless they have risk problems, we would like to maintain long-term relationships (with GPs). We look closely at three factors - fund performance, stability and investment conditions. We focus on maintaining consistency because any rapid change in AUM has a big impact on performance.”

On Private Debt & Equity (Jeong Hee Lee, senior manager):

“Given that rumors of a crisis are spreading recently, when selecting management firms, we will look at how the manager defended risks in the prior financial crisis. We will likely focus on post-investment management capabilities. We need to avoid one-off relationships between managers and sales agents, as seen before. We hope talented people in our country to build relationships with good management firms.”

By Donghun Lee and Hugh YH Jeong

leedh@hankyung.com