NPS steps up drive for alternative investments

Korea’s National Pension Service, which manages the world’s third-largest pension fund, is prepared to make its first investment in hedge fund of funds, or FoHF, seeking higher profits from alternative investments.

The fund’s operation committee, led by the country’s health minister, previously decided to allocate a maximum of 0.5 percent of the total of 512.3 trillion won ($426.1 billion) for FoHFs early last year. However, a delayed appointment of a chief investment officer following an internal feud between former CEO Choi Kwang and then chief investment officer Hong Wan-seon slowed the process. 

With new chief investment officer Kang Myoun-wook taking the helm last month, the NPS is expected to jumpstart the process after receiving a roster of about 10 potential FoHFs from global consulting firm Mercer.

“It is true that the execution (to increase fund allocation in hedge funds) has been somewhat delayed but it also means we carried out the preparation process with extra precaution,” an NPS spokesperson said.

The shift in the NPS portfolio toward alternative investment options comes as the pension fund struggles for better returns amid low interest rates and volatile stock markets. Korea‘s key interest rate is at an all-time low of 1.5 percent, while the benchmark stock index, the KOSPI, is trading in a narrow-box range.

NPS plans to allocate increase funding for alternative investments from 9.9 percent of its total funds to 11.5 percent, or 65.3 trillion won, by the end of 2016.

While the move was welcomed, experts believe the NPS is riddled with shortcomings that must eventually be addressed.

“The attempt to invest in hedge funds is belated but definitely in the right direction, given that yield from alternative investments is more than double the average for the fund’s the total investments,” said Sam Y. Chung, director of Korea Alternative Investment Research Institute.

In 2015, the yield from alternative investments made by the NPS stood at 12.2 percent, comparing with the average 4.6 percent return from the fund’s overall investments.

However, managing hedge funds will entail risks that are completely different from those derived from traditional investment portfolio, he cautioned.

“The biggest concern now is the lack of experts. There are only two to three professionals, as far as I know, handling hedge funds out of some 220 people in the NPS,” Chung said.

The NPS spokesperson said the institution has hired four investment staffs to take care of investment in hedge funds.

Meanwhile, the NPS stated that so far, it has no criteria regarding the physical location of the hedge funds-of-funds firm when it makes a final decision.

Despite these claims, foreign fund managers such as Grosvenor Capital Management LP and Pacific Alternative Asset Management Co. LLC are being mentioned by the local media as potential candidates as they have offices in Seoul, or have plans to launch them. Blackstone Group was also included as a possible bidder.

But even if foreign hedge funds open offices in Seoul, they require registration approval from the Financial Services Commission to start operations. A FSC official said the commission has approved the registration of only one foreign hedge fund management company to date -- Australia-based hedge fund manager Millinium Capital Managers as of Feb. 22. The company could not be reached for further comment.

Observers expect the selection process to take about two months, including bidding and due diligence. NPS will be able to single out the final candidate in late June, according to some local news reports.


By Kim Yoon-mi 
(yoonmi@heraldcorp.com)