[ASK 2016 SUMMUT] NPS, KIC see gradual increase in hedge fund investment

  • 2016-05-23

NPS says its strict transparency requirement may deter talented GPs; to adopt flexible approach to solve the problem

– KIC to make the best of hedge funds characteristics, not requiring top-level transparency; sees only hedge funds with differentiated strategies survive; seeks balanced approach, rather than pursuing a specific strategy.

– Korea Post to chase a stable and lower volatility play; pursuing market-neutral strategy for time being

In a panel discussion of the ASK 2016 Global Private Debt & Equity Summit hosted by the Korean Economic Daily on May 18-19 in Seoul, three major limited partners (LPs) in the country shared their investment plans and the outlook for hedge funds.

The following is the translation of the panel discussion in the summit.

Moderator: Andrew Shin, Head of Investment Services, Korea, Willis Towers Watson


1. Geun-hwan Jung, Manager of National Pension Service (NPS)
2. Yong Shin, Head of External Management Team of Korea Investment Corporation (KIC)
3. Hyun Woo Jin, Deputy Director of Korea Post Insurance
▶Moderator: “Let me give you a brief introduction to today’s panelists and their institutions. KIC started hedge fund investments in 2010. The investment size is about 5 trillion won ($4.2 billion) and four officials administer it. Regarding their execution types, they are making direct investment, rather than investing in funds of hedge funds. The size of investment is worth about 150 billion won per case on average.”

“Second, Korea Post started hedge fund investment in 2008. The investment size is over 250 billion won ($210 million), and one official (of the KIC) administers it. It is investing in single funds and funds of hedge funds, simultaneously. The investment size is 30 to 50 billion won per case.”

“Lastly, the NPS is about to make its first hedge fund investment this year. A total of five officials, including two risk managers, administer it. They are expected to invest through funds of hedge funds.”

“Let me first ask Mr. Jung from the NPS. After making a decision last year to invest in hedge funds, the NPS has been brought to attention of market participants. Please keep us updated with the preparation and progress in hedge fund investments made by the NPS so far.”

Geun-hwan Jung (NPS) (hereinafter, “NPS”): “After winning approval from the fund management committee in 2015, the NPS revamped the process for hedge fund investment last year. We picked Mercer as an advisory firm for advising on shortlists, and now we are in the process of making a shortlist. Upon finalization of the shortlist, the NPS will go through due diligence study and review by the selection committee and finally pick LPs.”

“Let us explain this investment plan briefly. First off, the size of the investment is $1 billion. We will select two LPs for $500 million each. Second, our target rate of return is the 90-day U.S. T-bill rate (about 0.02%) plus 4.5%. Third, regarding investment strategy, we will employ multi-strategies including equity hedge and macro. Lastly, qualifications for LPs include having over $3 billion AUM, over 5-year management experience and institutional investors representing more than 50%. And lastly, they have to meet transparency conditions required by the NPS.”

▶Moderator: “I would like to ask Mr. Jin from Korea Post. It’s been a year since Korea Post moved the headquarters to Sejong City. The person in charge has changed. It has gone through many changes, including setting up a New York office. Please keep us updated with regard to portfolios, if there have been any change so far.”

▶Hyun Woo Jin (Korea Post) (hereinafter, “Korea Post”): “The purpose of opening the New York office was to strengthen networks with global GPs. Our hedge fund portfolios used to be focused on private equity funds at the early stages. Since then, we have added single strategy funds. Regarding new investment implementation, we are cautiously in a monitoring stage after market volatility went up sharply early this year and hedge fund LPs underperformed.”

▶Moderator: “Let me ask Mr. Shin from the KIC. KIC boosted hedge fund investments last year. I would like to know about the background.”

▶Yong Shin (KIC) (hereinafter, “KIC): “KIC’s assets consist of equities and bonds half and half. When interest rates were high in the past, if equities did not perform well, interest rates fell and protected our absolute returns. But now interest rates are so low that it cannot play a role as a buffer. With 90% of our assets focused on equities and bonds, we have been trying to expand alternative investments. Hedge fund investments can be seen as part of such efforts.”

“From the outside, we may be seen as doing a lot of hedge fund investments. It may be because we have started investing in funds pursuing absolute returns. We are studying hard to diversify away from equities and bonds.”

▶Moderator: “Three of your organizations are different in nature: sovereign wealth fund, insurance business unit and public pension fund, respectively. You may have different approaches to hedge funds and impose different restrictions or requirements. Please explain how different you are from other institutions.”

▶Korea Post: “When we proceed with a public tender process, foreign GPs tend to submit (proposals) focused on their outperforming funds. So it is difficult to grasp the overall market strategy. Thus, we have limitations in selecting talented managers. In addition, a herd behavior happens toward the strategies which generate decent returns. Since our assets are composed of insurance premiums, we sometimes revisit our hedge fund investment itself when they yield lower than expected returns.”

▶KIC: “The purpose of investment differs slightly by institution. Some institutions stress transparency of hedge funds. For us, we are trying to make the best of characteristics of each hedge fund. We do not require top-level transparency. On the downside, they lend themselves to quick liquidation, compared with other institutions. In the case of traditional assets, we are able to know a style change in very detail. But hedge funds tend to change hands quickly.”

“Speaking of difficulties, if we run portfolios in house directly, we can make a prompt response to markets. When an institution picks a GP, it works with them for the minimum three months and the maximum six months. So what we worry about is how to follow market trends. When we reach the phase of committing money after selecting a GP, the trend may have come to an end. Thus, we are grappling with the question whether the trend will be sustained or not.”

“Regarding hedge fund investments last year, outperforming funds were closed-end. So it was difficult to expand (our investment), while the asset size was growing. It is hard to commit a large amount of money. This may be a challenge to institutions.”

“What I meant earlier by saying changing hands quickly is not comparing it with other institutions, but comparing with the entrusted assets of equities and bonds. There is no statistical data. But when we reviewed the results of the past two to three years, about three to five funds were liquidated every year and rebalanced.”

▶NPS: “NPS is allowed to invest in hedge funds for up to 0.5% of its assets. It is true that funds of hedge funds have demerits such as charging double fees. But for an early investor, there are such advantages as reducing the possibility of undergoing trials and errors in the early stages and learning management know-how. That’s why many foreign and domestic pension funds are investing in funds of funds, or investing in both funds of funds and single funds simultaneously. NPS is planning to review its internal capabilities based on early (investment) performance and boost the investment size and investments in single funds.”

“NPS requires high-level transparency of underlying managers. This may make it difficult for talented underlying managers to muscle in, so we may have difficulty in achieving performance target. We will solve this problem by adopting a flexible approach, for example, having a certain level of time lags.”

▶Moderator: “I would like to have your outlook for the hedge fund market and counterplans. I also would like to know how much you are interested in Asian hedge funds, and among the strategies you are studying now, if there is any specific strategy that looks attractive.”

▶NPS: “NPS is set to make its first investment in hedge funds. Upon finalization of the shortlist, we will complete the selection of GPs within the third quarter of this year. Given that it is our initial investment, our focus will be on securing investment infrastructure based on transparency. Our plan is to gradually increase investment (in hedge funds), while entrusting them to GPs.”

“Before investing in Asian hedge funds, we will start investing in major markets, including the United States. On whether to expand investment into Asia hedge funds, we will review and scrutinize it later on. In other words, we will first achieve our first-step goals through investment in funds of hedge funds and then study whether to initiate investment in Asian funds.”

▶Korea Post: “We are expecting a U.S. interest rate hike, and an interest rate hike from China is likely to have a big impact on Asian markets. There are also variables related to currencies. We will set new investment plans and review how to change the existing portfolios in comprehensive consideration of the situation, including investment performance of global hedge funds.”

“Regarding a hedge fund which has invested in Asian markets, we are monitoring it. We think China-triggered volatility has a significant impact on Asian markets, and thus we are in a wait- and see-attitude. Recently, hedge funds have underperformed. And under the current market conditions, it seems appropriate to seek a stable and lower volatility play, rather than pursuing extra returns. Under the current circumstances, a market-neutral strategy which can minimize volatility is appropriate.”

▶KIC: “Since the end of last year, hedge funds have underperformed across the board. Thus, hedge fund investments have been slowing down after the upward trend came to an end.”

“However, in a longer term, we cannot help raising hedge fund assets. The aging population and other trends will make it unavoidable to decrease concentration on equities and bonds. But what I am worrying is that the number of hedge funds has dwindled sharply since the financial crisis. With the number rising again, they seem to have overlapping positions. Given that they have similar strategies, when market shocks happen, they make exits at the same time and increase (market) volatility. From now on, we think that only hedge funds with differentiated strategies may survive. I mean it will be difficult with duplicable ones.”

“We are looking to Asia positively. Relatively speaking, for the hedge fund industry, it is the area where it is less utilized. What we worry about is they do not have a deep pool of managers compared with the United States and Europe. Track records are required for institutional investors to move. So, after the screening process, there are only a few managers left which we can select. This problem, of course, is expected to be solved as the size of Asian hedge funds increases in a long term.”

“When setting an investment plan, KIC is trying to keep a balance, rather than pursuing a specific strategy. Given that we are not in the early stages of (hedge fund) investment, and seeing portfolios maturing to some degree, it does not suit us to pick a certain strategy and follow it. Having said that, there were many cases where we chose a fine strategy, entered the selection process, completed a legal review and implemented the investment, but the trend was no longer alive. We should not do in such a way that we sweep out a certain strategy and add a new one. Thus, we are trying to keep a balance.”