Daehan Investments & Securities is Korea's oldest and largest asset investment trust company. Formed in 1977, Daehan Securities took over the investment trust business from the Korea Investment Corporation; which was later dissolved. Following a recent merger, Daehan Securities now is part of the Hana Financial Group. David Bennett, General Manager discusses the firm's background and challenges of the hedge fund industry in Korea.
Can you give us a brief background on Daehan Securities and your corporate structure within the Hana Financial Group?
Daehan Investment & Securities is primarily involved in traditional fund distribution and amongst securities firms is the largest distributor of offshore funds in Korea as well as the proprietor of Korea's oldest asset management firm, Daehan Investment Trust Management Company. In June last year Hana Bank acquired Daehan Securities, which had previously been government controlled, and in December the bank and its affiliates were reorganised under the newly-created Hana Financial Group. Combined, Hana Bank, Hana Securities and Daehan Securities have close to 700 retail branches countrywide.
What is your current AUM?
Daehan Securities' AUM is approximately US$18 billion and that of the Hana Financial Group over US$100 billion.
What is your scope of operations?
The "Prime Marketing Team", which I am a part of, works with our institutional clients to identify appropriate alternative investments. Often these funds, be they hedge funds or structured products, will be packaged in an onshore fund. Our team was formed only recently to complement the existing institutional sales team, which focuses more on traditional products, particularly those that are fixed income in nature. Though only recently established, the PMT has been involved in institutional mandates of over US$100 million. My role within this team is product development, but I also work closely with colleagues outside the team on projects that are designed for our retail clients.
What is the investor's perception of alternative investments in Korea?
Several of the institutions with whom I've spoken recently have expressed considerable interest in private equity, real estate and, if one groups them into the alternatives space, commodities, but for hedge funds the collective stance has been one of ambivalence. The larger insurance companies and smaller pension funds began modestly allocating to hedge funds a few years ago, but several have been scaling back on their investments and, in extreme cases, have retreated entirely. This reaction is primarily out of disappointment with their returns over the past couple years, particularly when these investments have failed to outperform domestic government bonds.
The perceived inadequacy of these returns has been exacerbated by the performance of the local equity market. On top of this there remains a negative stigma concerning hedge funds in general, so for an institutional manager who proposes a hedge fund investment it can be difficult to build conviction amongst a doubtful investment committee. I remain optimistic, however, that hedge funds will become more widely accepted and believe that a renewed interest in hedge funds will gradually materialise as institutions begin to take a longer term view of their alternative investments.
How developed is the hedge fund industry in Korea at the moment compared to other Asian countries?
Korea definitely seems to be trailing its regional peers, but this applies not only to hedge funds in particular but to the asset management industry in general. As a percentage of GDP the industry remains undeveloped and global asset managers are taking notice of the potential. Keep in mind that registered offshore funds only became available ten years ago, and there are still only a handful of non-Korean managers with a domestic presence. Given this context it is perhaps natural that hedge funds would lag, particular in light of the trepidation toward which regulators have approached such funds.
What is the appetite for foreign funds, especially hedge funds?
Emerging markets is a major theme. The BRICS acronym is widely understood here even by many retail investors, who are pouring into the market as the instalment plan system has been adopted with fervour and continues to witness considerable cash inflows. Europe has also enjoyed considerable attention. Of the country-focused funds, clients have expressed the most interest in China and Japan, and we have worked with institutions in putting together region-specific baskets of mutual funds and hedge funds.
Are the current regulations favourable for starting hedge funds in Korea?
The regulations are not conducive to establishing an asset management firm, let alone a hedge fund management firm. In stark contrast to the competition that we see taking place between Hong Kong and Singapore to attract managers, Korean law seeks to discourage the setting up of "boutique" or smaller asset management firms by requiring that they be significantly capitalised. To run a commingled fund I believe you need to put up the Korean won equivalent of US$10 million. Consequently, the few Korea-focused hedge funds of which I'm aware with a local presence merely have a research office, though even if they had a more meaningful presence there isn't an adequate infrastructure of service providers and lenders to accommodate them. One example is shorting, which is difficult to execute domestically. I believe that only offshore firms and domestic prop desks are allowed to short through the Korea Securities Depository, and that the borrowing limit had been US$10 million per account, though that they have recently indicated it may be possible to borrow up to US$50 million under certain circumstances. Managers interested in shorting Korean stock thus primarily deal offshore with prime brokers, but their inventory typically consists of the larger names, often making it difficult and expensive to short the lower caps.
How much Korean money is currently invested in alternatives?
Very hard to say but I'm guessing that if one includes equity derivative products then approximately US$25 billion, of which most likely around US$1.5 billion would be related to hedge funds. Given that the nation's largest pension fund is as big as CalPERS, not to mention the existence of other domestic institutions of considerable size, the present day allocation to hedge funds in relative terms is marginal to say the least.
What are the regulations impacting hedge fund investments in the retail market?
The regulations aren't specific but our conversations with the regulator on the matter have been. To make a long story short, if a fund cannot provide real daily pricing that is verified by a recognised information source, then there is little chance that the fund will be approved, even if in a 100% principal-protected note structure. An exception has been investible indices, which due to their presence on a platform have been able to accommodate this condition, though these proposals are considered on a case-by-case basis. There have also been efforts to circumvent the restrictions imposed upon "public" or retail funds by combining a group of hedge funds in a series of private placements, which are limited to 29 investors. The initiative worked initially, but a combination of market confusion and regulator discontent led to the practice being abandoned. I am nonetheless confident that at some point the current restrictions will be relaxed, particularly as hedge funds come to play an increasing role in institutional portfolios and given that regulators regionally are taking a more accommodative stance. The obvious question, however, is "when will this take place?" I wish I knew.
Which type of institutions, who have not allocated to alternatives currently, will do so in the near future?
Many of the larger institutional investors have or have had exposure but the medium-to-smaller institutions are contemplating a first-time allocation, which in most cases will probably be in a structured note format. This is an expensive means of obtaining exposure, but one that seems to alleviate anxiety or acts as a bond-type substitute. We are discussing this potential with several such institutions, and I believe that there will be several first-time subscribers this year.
David P. Bennett
Daehan Investment & Securities
+82 2 3771 7138