with David Bennett, General Manager,
Prime Marketing Group, Daehan Investment
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.
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
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
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.