Hedge Funds in Korea: Industry Overview (2)
A rising market with regulatory support and positive sentiment
Majority of foreign investors find it surprisingly difficult to penetrate the Korean hedge fund market due to its limited accessibility and availability of information in foreign language. The series, “Hedge Funds in Korea” is published to tackle such inefficiency and analyze Korean hedge fund industry in-depth in multiple dimensions.
While the global hedge fund industry has been continuously expanding since 1991, establishment of hedge fund entities was prohibited in South Korea due to tightening regulatory control over the financial market until late 2011. However, earlier that year, the South Korean National Assembly purposefully proposed a financial regulatory revision to boost the domestic market growth by promoting cash inflow into local investments, including the ones for hedge funds. The proposal sequentially got approved and enacted into law in Dec 2011, giving birth to the very first kinds of Korean hedge fund.
Ever since its inception, Korean hedge fund industry constantly showed significant growth in market size in terms of aggregated AUM thanks to favorable regulatory support and high demand from not only institutional but also retail investors. In addition, the regional hedge funds also outperformed the global hedge fund market.
- Dec 2017: Market size of USD $12.3bn and 765 nos. of active hedge funds
- Aug 2018: Market size of USD $23.0bn and 1358 nos. of active hedge funds
- 12.9% avg. return in 2017 compared to Eurekahedge Hedge Fund Index return of 8.3%
Despite of attractive numbers and potential opportunities, majority of foreign investors find it surprisingly difficult to penetrate the Korean hedge fund market due to its limited accessibility and availability of information in foreign language.
“Hedge Funds in Korea” series was prepared to tackle such inefficiency and analyze Korean hedge fund industry in-depth in multiple dimensions.
iii) Fund Performances
a) Overview
b) Funds with 1 ~ 3 years since inception
c) Funds with 3 ~ 5 years since inception
d) Funds with 5+ years since inception
iv) Key Regulation Overview
Hedge-fund related key regulation changes in Korean market are summarized below: -
a) Revision of Capital Market Law (Oct 2019 - expected)
Oct 2019 revision will relieve a core regulation regarding maximum number of investors per hedge fund entity.
- Maximum number of investors per hedge fund entity to be increased from 49 to 100
- Only the current investors with active allocation will be counted (i.e., historical investors will not be counted anymore)
b) Revision of Capital Market Law (Jul 2018)
Jul 2018 revision eased access of non-institutional investors and fund of funds to private equity and hedge fund entities.
- Granted permission for establishment of fund of funds structure specialized in private equity and hedge fund by increasing its maximum exposure limit to private equity and hedge fund from 50% to 100%
- Eased access of non-institutional investors’ access to hedge funds by capping the minimum investment requirement for the newly proposed fund of funds structure at USD $5,000
c) Revision of Capital Market Law (Oct 2015)
Oct 2015 revision eased establishment and investment regulations of private equity and hedge fund entities and reduced minimum ticket size required for investors to the entities.
- Changed the establishment of private investment fund to be effective from approval to reporting basis, significantly reducing the processing time
- Relieved the hedge fund minimum requirements: min. AUM from USD $6mn to USD $2mn, and portfolio managers no longer required to have min. 2 years of hands-on portfolio management experience (min. 3 years of finance related working experience is still required)
- Eased access of investors’ access to hedge funds by reducing the minimum investment requirement for hedge funds from USD $500,000 to USD $100,000
- Increased maximum leverage and relieved the regulations related to utilization of free cash
- Removed maximum exposure limit per sector for hedge funds, granting greater freedom of investments
d) Revision of Capital Market Law (Dec 2011)
Dec 2011 revision gave birth to the hedge fund market in Korea and outlined basic criteria.
- Granted permission for establishment of hedge fund structure
- Minimum AUM required was USD $6mn, and minimum 3 portfolio managers with min. 3 years of finance related working experience and 2 years of hands-on portfolio management experience were required
- Minimum investment required per investor was at USD $500,000
- Number of investors per fund is limited to 49. Once an investor signs an investment agreement, a quota will be filled permanently. The filled quota will not be available again even after the investor liquidates the position. This causes average fund AUM to get smaller and funds to establish many variations such as Fund no.1, no.2, no.3 etc.
Thanks for the reading the Q4 2018 “Hedge Funds in Korea” report.
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