KOSPI’s sluggishness swells long-short funds

South Korean stock investors, fed up waiting for the KOSPI index to recapture its 2011 record high, are plowing cash into funds that can make money no matter which way the market is headed.

Long-short funds, which bet on both rising and falling shares, have grown their assets more than ninefold in the past year to 2 trillion won ($1.9 billion), even as the nation’s equity funds shrank, according to Seoul-based researcher KG Zeroin Co.

Individuals pulled $22 billion from stocks since the KOSPI’s all-time high, as the gauge lost 13 percent and trailed the MSCI All-Country World Index by 27 percentage points through yesterday.

Funds run by Midas International Asset Management Ltd., Truston Asset Management Co. and Mirae Asset Global Investments Co. have outperformed benchmark indexes for South Korean shares and bonds as exports slowed and government borrowing costs rose. Opportunities to find both undervalued and overvalued companies in the nation’s $1.2 trillion stock market have increased, with a measure of the valuation gaps among KOSPI members growing to the widest in more than a year, data compiled by Bloomberg show.

“Investors are turning more to long-short funds as the Korean stock market isn’t in its best condition,” said Heo Pil-seok, the Seoul-based chief executive officer at Midas, whose long-short fund returned 7.45 percent during the year through March 5. “We play company to company and focus on valuations.”

The growth in long-short funds from 235.3 billion won a year ago compares with a 5 percent drop in equity mutual fund assets and an 11 percent increase for bond funds, according to Zeroin. The average one-year return of 10 funds tracked by the company with more than 1 billion won in net assets was 4.8 percent through March 5, versus the KOSPI’s 2.25 percent drop and a 0.1 percent gain in the BoA Merrill Lynch South Korea Government Index of debt.

The outlook for KOSPI gains has diminished after most companies in the gauge reported disappointing fourth-quarter earnings, while overseas shipments last month trailed economists’ estimates amid slower economic growth in China, South Korea’s biggest export market. The KOSPI has traded in a range between about 2,100 and 1,750 during the past two years and yesterday fell 1.6 percent, the most in five weeks, to 1,932.54. It rose 0.5 percent as of 12:26 p.m. in Seoul.

Government bonds have also lost appeal to some investors, with 1.1 trillion won of foreign outflows in the first two months of this year, amid expectations that the Bank of Korea will raise its benchmark interest rate for the first time since 2011. Half of the 26 analysts surveyed by Bloomberg News expect at least one increase this year. 

(Bloomberg)