South Korean regulators won't ease hedge fund restrictions anytime soon, says expert

23 Jul, 2012

South Korean regulators are unlikely to liberalise the country’s restrictive rules facing hedge fund managers anytime soon, a regional expert has said.

There was excitement in 2011 when Korean authorities announced revisions to the Capital Market Consolidation Act thereby facilitating the establishment of an onshore hedge fund industry. However, managers still face significant challenges.

“South Korean regulators have a lot of restrictions on hedge funds, particularly non-Korean entities. The corporate capital requirements are very high which is acting as a barrier to growth and I do not expect the regulators to ease any of their restrictions,” said Hank Morris, an advisor for North Asia at Triple A Partners, a Hong Kong-based third party marketing firm.

Investors must make a minimum investment of 500 million won into a Korean hedge fund, while asset managers and brokerages hoping to establish a hedge fund must have at least 10 trillion won and 1 trillion won in Assets under Management (AuM) respectively.

It is unsurprising therefore just 17 domestic managers have launched since the rules were eased in December 2011. These firms collectively manage south of $500 million. Morris said most of the launches were modestly sized long/short equity vehicles running between $1 million and $5 million, adding their performance had been mixed.

The lack of uptake is also explained by the country’s onerous short-selling rules. Naked short selling is prohibited while authorities have repeatedly banned short-selling of financial stock altogether with the last ban only expiring in December 2011.

The impediments facing non-Korean managers are even worse.  “The incentives for foreign managers to move to Korea are not there. Foreign managers have to jump through a lot of hoops to get approved by the Korean regulators. Furthermore, Korean tax rates on personal income are far higher than what one pays in Hong Kong and Singapore. It is also very difficult for foreign investors to buy Korean-based hedge funds because of the unfavourable tax implications,” said Morris

Morris doubted Korean regulators would make life simpler for foreign managers. “The regulators at the moment want to keep a close eye on how their domestic industry fares. I doubt they also want foreign managers to overshadow the Korean managers. There is not that much motivation for regulators to ease restrictions,” he said.

The Korean hedge fund industry’s development will be slow and is unlikely to be competing with the more established albeit still immature Singaporean and Hong Kong markets in the near future. “If we fast forward five to 10 years, Korea will not be competing with Hong Kong or Singapore. However, I do believe Korean hedge funds will move away from long/short equity into more esoteric strategies,” said Morris.

According to news reports, China is also allowing hedge funds to market to its wealthy citizens. In January 2012, it was announced Beijing would launch a long anticipated centralised securities lending exchange, an essential prerequisite to the development of short-selling in mainland China. Morris said he had heard of managers hoping to set up in Shanghai and believed it was an exciting time for the region’s hedge fund industry.

Asia, more broadly, has seen decent capital inflows into its hedge fund industry. A survey by AsiaHedge revealed hedge funds raised $2 billion in the first 6 months of 2012, an increase of 50% over the previous six months. There were marginally more start-ups too – 32 so far in 2012 compared with 30 in the six months ending December 2011.  Asia-ex Japan managers have been relatively flat performance wise this year delivering returns of 1.02%, somewhat shy of the industry average of 1.87%.

Capital Market Consolidation ActChinaHong KongregulationSingaporeSouth KoreaTriple A Partners