Introduction of Korean hedge fund
2011/07/27 1 Comment
The hottest issue in the Korean financial market is the introduction of the “Korean hedge fund”. Until recently, many Korean private funds were strictly regulated compared to their American and European counterparts because restrictions were imposed on them. For this reason, the autonomy of managers was restricted and little money was invested in high-risk industries.
Also, due to a rapidly aging population and changes in socio-economic conditions, demand of various financial products increased, thereby sparking discussions about the necessity of hedge funds and the reorganization of existing regulations.
With the prevalent expectation that the first Korean hedge fund will show up this year, we would like to give a brief overview of the Korean hedge fund
The way of the introduction.
The Korean hedge fund is different from the existing American and British models. Despite the fact that the necessity of restriction into the financial industry is widely recognized, the Korean government lightens restrictions to guarantee the autonomy of managers, albeit to a lesser degree than global hedge funds
First, most of the regulations on operation were significantly alleviated to guarantee autonomous operation, the core strategy of private funds. For example, the government abolished the rule that required one half of fund’s assets be invested into companies subject to restructuring. In addition, the permissible debts of each fund also were increased up to 400%. However, short stock selling is prohibited and operators have to be registered.
The way of the operation.
(1) The range of investors.
<Profit and deviation ratio>
Source: Hennessee group(2000.1~2009.12)
The hedge fund has the following characteristics; (a) high information asymmetry (b) complex structure of productions (c) a big profit gap between players. Because its structure has both high profit and high risk ratio, the government limits the range of investors to financial experts who are capable of enduring high-risk.
Normal companies and individuals can invest through private funds. The government has a plan to set the standard of investors to 500mil~1bil(won) based solely on the amount of initial investment, and then gradually extend the range on the basis of asset and asset/debt ratio and so on.
(2) The range of operators
Operators are initially restricted to existing investment advisors, operation companies, and securities. This will gradually be opened to foreign hedge funds and other financial companies considering the market situation and the inspection ability of authorities. Securities have to choose only one business between prime brokers and hedge funds because of internal discord.
There are opposing ideas on the necessary conditions of exiting operation companies; one insists high entry barriers and the other argues against them. The idea of alleviating conditions according to the market is regarded as the most likely plan.
Protection of investors from risk
As mentioned earlier, the Korean hedge fund has a more limited character than other funds because much emphasis was placed on financial regulations after the global economic crisis.
Moreover it would be the first time that Korean invests into the hedge fund. For the protection investors from high risk, the government command hedge funds to report on the existing state of operation and source of financial instrument.
<World Asset of hedge fund (2002~2009) and expectation (2010~2013)>
Source: Hennessee group
In spite of the global financial crisis and some disagreement on the equity capital of hedge fund and the others, it should no longer hold back the introduction of hedge fund. For the request of investors and the global financial flow and growth of domestic financial industry, it is time for productive talks in favor of the successful introduction of the hedge fund and the prevention of side effects.