Korea Readies Hedge Fund Market Opening

"A race horse that can run a mile a few seconds faster is worth twice as much. That little extra proves to be the greatest value."

John D. Hess

Late last year, various "voices" representative of political circles and the financial authorities in Korea announced that a proposed opening up of the alternative investment market would be brought forward from 2012 to 2009.

The motivation: to increase the efficiency and effectiveness of Korea's financial markets.

This could potentially be a BIG boost to Korea as a financial center, not so much because it will soak up investments otherwise directed at India or China but rather because it will probably compete closely with the region's number one laggard economy, Japan.

Korea stands to attract considerable attention from budding hedge fund managers because of the relative size of the financial markets; the vibrancy of its winning world-class brand name industrial concerns whether in autos, consumer durables and trading companies; the potential gains from a Korean perestroika from the opneing up of its northern trading partner on the penninsula; and, the arbitrage of the Korean Discount as political calm takes hold. In fact, it is worth remembering that Korea's financial markets held one of the lowest PE valuations in Asia (behind Thailand).

Of course, all it is not clear sailing for Korea to make massive strides. There is still a hint of insularity, opacity mixed with a strain of "national pride" associated with any attempts by foreign investor activists (Lone Star anyone?) to exert some shareholder responsibility on the still-closeted industrial face. This must change, if Korea is to succesfully vault ahead of Japan in terms of hedge fund market activity.

It is possible that Korea would be like Japan was in 2004. Then, hedge funds capital amounting to US$32 billion was evident in the markets, mostly in equities. However, then, Japan-specific long/short equity funds amounted to about US$28 billion. Today, most hedge fund assets trading Korea comes from global long/short equity shops, multi-strategy shops or those managers with a pan-Asian investment allocation approach. In the case of Japan, assets grew at a phenomenal 30% CAGR every six months through 2006.

The changing climate and attitude to alternative investments should also serve as a powerful signal to brand name HFoFs and private equity shops. Come and sell your wares! There are many deep pocketed insurers, financial institutions, trading companies, brokers and even pension funds that will be eager and willing product buyers.

Korean investors could be very signficant players in the global marketplace. Consider that Japanese institutional investors have over an estimated US$45-50 billion in global hedge fund product buying power. Expect marketing teams to stop off in Seoul, and prime brokers to show off their relationship "wares" in the very near future. Although, if 1Q08 hedge fund performance continues to disappoint one might see immediate demand for private equity, real estate and commodities on the Korean alternative investment shopping list. Mahalo.