Korean public employees’ pension to take more FX risk from alternatives

The Government Employees Pension Service (GEPS) plans to abandon its principle of hedging currency exposure from investing in overseas alternatives, as a growing number of South Korean pension funds are willing to take foreign exchange risks that could lead to additional gains.

Last year, the National Pension Service discontinued to hedge against currency exposure for all types of global investments. The Teachers’ Pension and other pension funds in South Korea followed suit, reducing hedge positions for overseas assets.

GEPS will revise its guidelines on investment objectives, policy and strategies soon to drop the currency hedge strategy for alternative investments, according to investment banking sources on May 21.

It will finalize the revision, which also includes the Stewardship Code introduction, at its steering committee meeting due on May 25. The Stewardship Code is a set of guidelines for institutional investors to actively engage with companies in which they invest as a shareholder.

In 2017, GEPS adopted the non-currency hedging strategy for global equities. But it will continue to hedge FX risk from all overseas fixed income.

For some types of global alternatives, the pension fund may enter into hedging contracts, if needed.

Currency hedging costs have eaten into returns from overseas investments at South Korean pension funds because they have to pay higher interest rates to enter into the hedge contracts. Rather, unhedged overseas assets tended to generate additional gains when translated into the Korean won.

GEPS manages 8.2 trillion won ($6.7 billion) in assets as of the end of last year which returned a 9.56%. The portfolio is comprised of 3.75 trillion won fixed income, 2.80 trillion won equities and 1.65 trillion won alternatives.

In the first three months of this year, its return fell into negative territory at minus 5.7%.

Write to Jung-hwan Hwang at Jung@hankyung.com