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National Pension Service

NPS to ease hedge fund transparency requirements

Oct 30, 2020 (Gmt+09:00)

The National Pension Service will loosen transparency requirements on hedge funds to increase the pool of its hedge fund management firms, in efforts to speed investment in its growing assets and bolster returns, the South Korean pension fund said.

Its top decision-making body Investment Management Committee decided on Oct. 30 to include as candidates hedge fund houses that provide their portfolio details soley to a third-party specialized firm, such as a risk aggregator.

In 2016 NPS began allocating up to 0.5% of its assets to hedge fund investment. Last year, it diversified into single-manager hedge funds, giving mandates to five single-manager funds.

But the world’s No. 3 pension scheme with 777 trillion won ($689 billion) in asset has restricted hedge fund allocation to those giving first-hand information on their portfolios, reflecting concerns about the hedge fund houses' complex investment strategies and reluctance to share information.  

“A majority of (hedge) funds declined to accept our information disclosure requirements, saying they run counter to the principle of fairness and confidentiality agreements with other investors, alongside concerns about disclosing their portfolio details,” NPS said in a statement released after the committee meeting.

“Among the qualified funds, only 34% satisfy our transparency requirements, meaning most of those qualified funds will be eliminated from the early stages of selection.”

The shrinking pool led to a delay in capital deployment to the asset class and poor returns. NPS' hedge fund portfolio underperformed its benchmark by 0.30% in 2016; 1.31% in 2017; 2.22% in 2019; and 1.45% in 2019. In the first seven months to July of this year, it underperformed the benchmark by 1.49%.

NPS expects the loosened requirements to double the pool of its candidate hedge fund managers, and upgrade its hedge fund portfolio.

Now its risk aggregator will gather details about hedge fund managers' portfolios, analyze and process the information, and provide a comprehensive report about their risk management to the NPS, the pension fund said.

It hired Albourne and MSCI Inc. as the consultant and the risk aggregator, respectively, to tighten risk management on hedge funds.

The NPS decisions comes as Korean pension funds are looking to diversify their pool of alternative asset managers to boost exposure to new strategies and regions.

Korea’s institutional investors, including the NPS, rated general partners’ commitment and fund transparency as the most important selection factors following track record, according to a recent poll of 17 Korean institutional investors by The Korea Economic Daily.

By Jung-hwan Hwang 

Yeonhee Kim edited this article.

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