Competition brewing over fledging hedge funds

Brokerages seek to capture rich investors on expectations of financial deregulation


Brokerages are struggling to capture wealthy investors with high-yielding private equity products as deregulation in homegrown hedge funds looms large.

Money poured into hedge fund-style products as soon as top brokerages such as Samsung, Woori Investment and Korea Investment rolled them out in the past month, sparking competition in the industry to grab high-net-worth investors.

The industry is expecting the Financial Services Commission to permit homegrown hedge funds for the first time in the second half of this year.

“We’re seeing huge demand for hedge fund products from the affluent in the Gangnam area. I expect some money moving away from wrap accounts when the regulator permits homegrown hedge funds later this year,” a private equity manager at Woori Investment and Securities said.

Because grabbing wealthy customers before the regulation overhaul is seen as key to spearheading the opening market, brokerages are signing contracts with global fund managers to sell hedge funds managed abroad to local clients.

When the industry gains permission for the homegrown hedge funds, brokerages will be able to put together actively managed portfolios investing in local stocks, commodities and bonds.

Hedge funds employ active investment strategies for a group of private, risk-averse investor groups who meet the criteria set by regulators. They typically pursue absolute returns above the market rate by taking arbitrage opportunities in stocks, bonds and commodities.

The National Assembly passed a law in 2009 allowing hedge funds but the restrictions that followed were so stiff that no local hedge funds were created. But the FSC plans to phase out the requirement on onshore fund managers to invest more than 50 percent of their assets in corporate restructuring programs within the year. Its revision proposal to the National Assembly also includes expanding the debt to ratio restriction from the current 300 percent.

Top domestic brokerages including Samsung Securities, Woori Investment & Securities, and Korea investment this year introduced hedge fund-style products put together by global funds such as Black Stone and CLSA Asia Pacific.

Samsung Securities attracted more than 65 billion won ($60.1 million) since February when its hedge-fund style investment vehicle launched with London-based Man Group.

“The main goal for hedge fund investors is to beat the market return by two to three times by catching opportunities during the stock downturns, so our product has been popular among risk-taking investors,” a Samsung Securities official said.

Woori’s “Premier Blue Hedge Fund,” launched in March attracted 370 billion won. The company expects wealthy investors to flock to hedge fund products when homegrown products investing in local stocks and commodities come up.

The country is increasingly seeing a wealthy middle class. The number of Koreans with more than 1 billion won in net worth has almost tripled to 130,000 in the past decade, according to Seo Jae-Hyeong, chief of investor advisory firm Korea Creative Investment.

By Cynthia J. Kim (cynthiak@heraldcorp.com)