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Hedge Funds & Korea's Future

clock03-29-2010, 12:36 AM
Yorum: #1
ANALYSIS-S.Korea hedge fund push faces doubts, challenges

SEOUL, Aug 7 (Reuters) - South Korea has seen its financial sector's future, and it's hedge funds.

Asia's fourth-largest economy is seeking to develop homegrown hedge funds, while attracting foreign money managers that would raise its clout as an Asian financial centre.

This would be a major event in a country that has been highly protective of its companies and fearful that hedge fund trading strategies, which typically include short selling and leveraging bets, will heighten volatility in a market dominated by retail investors.

But doubts remain over how swiftly regulations will be eased or whether public resentment against hedge funds and a culture of low fees can be overcome. Blow-ups of hedge funds such as at Bear Stearns are unlikely to make the swaying easier.

Finance Minister Kwon O-kyu last month noted South Korea would draft a road map this year to allow the establishment of locally-incorporated hedge funds, sparking buzz that the government was serious about its goal.

"It is an important step towards growing the South Korean alternative investment market," said Kim Dong-gun, managing director of Seoul Z Partners, a private equity firm. "South Korea is an attractive market because of its low multiples."

South Korea has long been known for what is called a "Korea Discount" -- its firms trade at less than their real value due to doubts about corporate transparency and geopolitical risks in the divided peninsula.

According to Citigroup, South Korea is the second-cheapest market in Asia after Thailand, trading at a price to 2007 earnings ratio of 14 times -- a main reason why some blue chips such as steel maker POSCO have long been rumoured to be potential targets for foreign investors.

Inefficiently-run companies and those with plenty of idle cash could also attract hedge funds, as these are harder to find in more developed markets such as the United States or Australia, a Hong Kong-based hedge fund manager said.

Hedge funds typically pressure such firms to distribute cash or make other changes, including selling off assets or putting themselves up for sale, that might boost the share price.

That was the case when Carl Icahn and his partners crossed swords with KT&G Corp. last year, which ended with the tobacco firm promising to return up to $2.9 billion to shareholders, in line with global peers, and with the billionaire investor making a handsome profit on his investment.

Asian markets as a whole are also seen as richer in the pricing inefficiencies that many hedge funds seek to exploit.

Hedge funds investing in Asia generated average returns of 16.3 percent last year, according to the Eurekahedge Asian Hedge Fund Index, topping returns of 11.8 percent in North America and 10.4 percent in Europe.

There's room for growth in South Korea, where hedge funds make up just 1-2 percent of institutional investors' portfolios, according to Patrick Tuohy, who leads HSBC Private Bank's alternative funds group in Asia, in remarks made last month at seminar in Seoul.

Only offshore hedge funds are now operating in South Korea, including high-profile global names like SAC Capital Advisors, Citadel Investment Group LLC. and Boston-based Wellington Management Co.


Rules that virtually ban direct short-selling -- or borrowing a security and selling it on expectations of a price fall -- would be among the first in need of change.

Shorting a stock can be onerous and complicated, with severe restrictions that lead hedge funds operating in South Korea to resort to prime brokerages for expensive synthetic versions.

The government could also face a quandary between plans to make South Korea a financial hub and the reality that hedge funds will flock to countries with the most favourable tax regimes.

Revising what many consider a vague and onerous taxation system would be key, and the government would need to allow some local-grown hedge funds to move abroad to maximise returns and attract foreign money.

South Korea would need to change the fee structure as well, as fees on traditional assets average 50-75 basis points, while total fees for fund sales, including management commissions, cannot exceed 5 percent annually.

Hedge funds typically charge annual management fees of 2 percent as well as performance fees of 20 percent.

"I don't think performance fees are acknowledged or understood here, and I'm not sure how they would be perceived," said David P. Bennett, who deals with hedge funds as general manager of institutional marketing at Hana Daetoo Securities.


But perhaps the biggest obstacle remains overcoming public perceptions in a country with long memories of the Asian financial crisis a decade ago, and one that is uncomfortable with big profits, especially if made by foreign investors.

"When the IMF crisis happened, people here believe our country was attacked by global macro hedge funds. So some people are strongly against short sellers," said Kim Hyun-tae, a fund manager at Landmark Investment Management, who teaches a course on hedge fund strategies.

South Koreans closed ranks for KT&G and several years ago when Dubai-based Sovereign Asset Management tried but failed to oust then-called SK Corp.'s fraud-convicted Chairman Chey Tae-won.

But to those optimistic for the development of a hedge fund culture, both cases show the flip side of the coin: that there are profits to be made by focusing on South Korean underperformers.
clock07-07-2012, 05:56 PM
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