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Prepared by Jay Kim

Mar 25, 2019

Korean Hedge Fund Market Research


A rising market with regulatory support and positive sentiment

i) Key Statistics

USD $23.0bn
market size (AUM) in Aug 2018. Grew
from USD $12.3bn as of Dec 2017
12.9% Avg. Return
in 2017. Outperformed Eurekahedge Hedge
Fund Index return of 8.3%
1358 nos.
of active hedge funds in Jun 2018,
grew from 765 nos. as of Dec 2017

ii) Market Overview

While the global hedge fund industry has been continuously expanding since 1991, establishment of hedge fund
entities was prohibited in South Korea due to tightening regulatory control over the financial market until late
2011. However, earlier that year, the South Korean National Assembly purposefully proposed a financial
regulatory revision to boost the domestic market growth by promoting cash inflow into local investments,
including the ones for hedge funds. The proposal sequentially got approved and enacted into law in Dec 2011,
giving birth to the very first kinds of Korean hedge fund.

Ever since its inception, Korean hedge fund industry constantly showed significant growth in market size in
terms of aggregated AUM thanks to favorable regulatory support and high demand from not only institutional
but also retail investors. In addition, the regional hedge funds also outperformed the global hedge fund market.

- Dec 2017: Market size of USD $12.3bn and 765 nos. of active hedge funds

- Aug 2018: Market size of USD $23.0bn and 1358 nos. of active hedge funds

- 12.9% avg. return in 2017 compared to Eurekahedge Hedge Fund Index return of 8.3%

Despite of attractive numbers and potential opportunities, majority of foreign investors find it surprisingly
difficult to penetrate the Korean hedge fund market due to its limited accessibility and availability of information
in foreign language.

“Hedge Funds in Korea” report was prepared to tackle such inefficiency and analyze Korean hedge fund industry
in-depth in multiple dimensions.

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iii) Industry Performance

Korean Hedge Funds Eurekahedge Korean


Year MSCI World Index KOSPI
(by The Bell) Hedge Fund Index

2018 (until Jun) 3.94% -3.92% -0.66% -5.73%

2017 12.89% 15.13% 23.07% 21.76%

2016 - -6.64% 8.15% 3.32%

2015 - 1.50% -0.32% 2.39%

2014 - 10.64% 5.50% -4.76%

HFRX Global Hedge Eurekahedge Hedge Eurekahedge Asian Eurekahedge China Eurekahedge Japan
Year
Fund Index Fund Index Hedge Fund Index Hedge Fund Index Hedge Fund Index

2018 (until Jun) -0.85% 0.02% -1.12% -0.08% -2.46%

2017 5.99% 8.27% 17.16% 29.80% 12.91%

2016 2.50% 4.72% 0.52% -4.40% 1.69%

2015 -3.64% 2.17% 6.50% 10.14% 6.93%

2014 -0.58% 5.11% 6.93% 8.38% 5.36%

Above is the table summarizing last 5 years of market performance indices. The performance of the Korean hedge
funds is assessed by two measures: Korean Hedge Funds (by The Bell) and Eurekahedge Korean Hedge Fund
Index.

a) Korean Hedge Funds (by The Bell): “The Bell” is the largest Korean hedge funds specialized database
& media established in 2017. Constitutes of 214 underlying funds. However, the data is only available
biannually from 2017 onward.
b) Eurekahedge Korean Hedge Fund Index: Hedge fund index by “Eurekahedge”, one of the largest global
hedge fund database providers. The index has relatively low credibility as it constitutes of 7 underlying funds
only, compared to its other indices such as China (70 funds) and Japan (65 funds) from the same provider.

Cross-regional and cross-sectoral comparative analyses were carried out using other regional indices, which are
also enclosed in the tables. Please note that period prior to 2017 shall not be discussed as no statistically reliable
information is available.

The key information and findings are summarized below :-

• During Jan - Jun 2018, the Korean hedge funds managed to generate 3.94% of positive return when both the
MSCI World Index and KOSPI dropped by -0.66% and -5.73% respectively. During the same period, the
Chinese and Japanese hedge funds showed performance of -0.08% and -2.46% each
• In 2017, Korean hedge funds generated 12.89% of positive return. However, this is lower compared to the
MSCI World Index and KOSPI which grew by 23.07% and 21.76% respectively and the Chinese and Japanese
hedge funds which returned 29.80% and 12.91% each
• Korean hedge funds outperformed the global hedge fund indices by HFR and Eurekahedge. However, their
ability to constantly outperform the market is yet to be proven

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iv) Fund Statistics and Capital Flow

Korean Hedge Fund Market Global Hedge Fund Market


(in USD $mn) Aggregated AUM (in USD $tn) Aggregated AUM

(Source : the Bell, March 2018) (Source : HFR, March 2018)

Number of Korean Hedge Funds Number of Global Hedge Funds

New Funds Closed Funds Total Funds


(Left) (Left) (Right)

(Source : the Bell, March 2018) (Source : HFR, March 2018)

Ever since the first inception of the Korean hedge funds in 2012, the market has been one of the fastest expanding
markets in the world. The total aggregated AUM of Korean hedge funds increased from USD $12.3bn in Dec 2017
to USD $23.0bn in Aug 2018, which nearly doubled in 8 months. The number of the funds also increased roughly
in line, from 765 nos. to 1358 nos. during the same period.

The major driver for the growth can largely be divided into two: the regulatory support and rising sentiment. Over
past years, the Korean government continuously showed numerous efforts to relieve fund-related regulations and
entry barriers to promote the growth of the domestic financial market, which shall be discussed in later section.
On the other hand, the global investors began to turn their attention to the Asian hedge fund market because of
not only the higher growth rate but also greater structural inefficiencies, which can often be turned into so-called
“alpha” by fund managers.

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(in USD $mn) (in USD $mn)

(Source : Korea Financial Investment Association)

(in USD $mn) (in USD $mn)

(Source : Korea Financial Investment Association)

Until few years ago, the investors had been primarily focused on the Chinese and Japanese markets when forming
their Asian portfolios due to greater accessibility and size. However, it can be observed from the graph above the
rising sentiment among foreign investors toward the Korean hedge fund market, especially since early 2016. In
fact, the foreign investors showed greater interest in the market even compared to the domestic ones, as can be
seen from the statistics below.

• Since Dec 2012, 97.5% of the monthly offshore capital flow was positive on a net basis. This is greater than
that of 77.78% from onshore capital flow
• Historically the offshore capital showed significantly lower outflow in percentage terms compared to that of
onshore capital. In Aug 2018, onshore to offshore capital ratio for the inflow was 3.0x while that for the
outflow was 14.1x

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Breakdown of Korean Hedge Funds by Strategy Breakdown of Global Hedge Funds by Strategy
Others Non-Classified

(Source : The Bell, March 2018) (Source : Preqin, March 2018)

Breakdown of Capital Flow to Korean Hedge Breakdown of Capital Flow to Global Hedge
(in USD $mn) Fund Market by Strategy (in USD $bn) Fund Market by Strategy

Others
Non-Classified

(Source : The Bell, March 2018)

(Source : Preqin, March 2018)

Prior to 2014, the major strategies employed by Korean hedge funds were fixed income and fundamental equity
L/S. In 2018, the fixed income strategy survived, which is easily understandable considering that Korea has one
of the largest bond markets in Asia, but the equity strategy did not despite of its global popularity. Also, the
proportion of funds under multi-strategies increased significantly. There are two key drivers behind this shift in
market trend: the diminishing market growth and escalating competition.

Korea enjoyed several years of high economic growth as in 2014, topping 3% every year. However, the growth rate
began to deteriorate despite of expansionary monetary policy, and it became increasingly difficult for the hedge
funds to generate satisfactory result only through fundamental equity strategy. In addition, the market itself
became increasingly competitive due to immensive inflow of newly established funds and more sophisticated
investors, who demanded higher level of unique portfolio management techniques – or alpha. Consequently,
greater number of funds began to utilize their regional expertise to take more active approaches and diversify
their approaches, which explains the widespread of multi-strategies within the Korean hedge fund market.

it is also notable that the fund with event driven strategy is rapidly increasing with similar rationale to that for the
multi-strategies.

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(in USD $mn) Average AUM of Korean Hedge Funds (in %) AUM Concentration of Korean Hedge Funds

AUM > $50mn AUM > $100mn

Fund Fund Fund Fund Fund


AUM AUM AUM AUM AUM
Nos. Nos. Nos. Nos. Nos.

(Source : the Bell, March 2018)

The graph above explicitly illustrates a rising competition within the Korean hedge fund industry, which can pose
concerns for potential investors. The average AUM per fund decreased from roughly USD $100mn to USD $20mn.
While the market itself is growing significantly, the size of the fund in average is getting smaller due to inflow of
newly established funds and the regulatory issue which will be discussed at section (vi) later.

• In Mar 2017, around 10% of the funds had AUM over USD $50mn. 60% of the total aggregated AUM was
concentrated to those funds.
• In Mar 2018, around 5% of the funds had AUM over USD $50. 45% of the total aggregated AUM was
concentrated to those funds.

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v) Fund Performances

v - a) Overview

Number of Multi-
Date Avg. Return Equity Hedge Long Biased Fixed Income Event Driven Others
Underlying Funds Strategies

Jan - Jun
148 nos. 3.96% 1.43% -3.76% 2.44% 7.54% 7.01% 1.74%
2018

Jan - Dec
214 nos. 12.89% 13.65% 31.18% 1.14% 12.58% 8.80% 4.13%
2017

(Source : the Bell)


(Source : Funds with > 1 year since inception and AUM > USD $100mn only)

v - b) Funds with 1 ~ 3 years since inception

Inception AUM Performance Performance


Rank Fund Name Main Strategy PBS
Date (Jun 2018) (Jan – Jun 2018) (Since Inception)

FindValue Pre-IPO Plus Fund NH Investment &


1 29 Jul 16 Event Driven $10.4 70.59 73.17
No.2 Securities

Shinhan
2 Lime Saturn Fund No.2 07 Jun 17 Multi Strategy $18.9 35.28 55.71
Investment Corp.

AlpenRoute MontBlanc 4807 Korea Investment


3 01 Jul 16 Multi Strategy $38.1 26.22 56.73
Multi Strategy Fund No.1 & Securities

Samsung
4 Lime Saturn Fund No.1 29 Apr 16 Multi Strategy $57.2 25.27 51.47
Securities

Samsung
5 Anda Mezzanine Fund No.1 20 Apr 16 Event Driven $10.3 22.79 27.69
Securities

FindValue Pre-IPO Plus Fund NH Investment &


6 21 Jan 16 Event Driven $63.9 22.42 82.27
No.1 Securities

Samsung
7 Lime GAIA Fund No.1 28 Dec 15 Multi Strategy $25.0 21.93 38.00
Securities

8 Lime Pluto-FI Fund No.1 02 Dec 16 Event Driven KB Securities $11.2 21.58 33.64

Mirae Asset
9 Must Fund No.1 07 Oct 16 Long Biased $114.7 20.69 78.73
Daewoo

Mirae Asset
10 Must Fund No.3 07 Oct 16 Long Biased $90.0 20.64 59.57
Daewoo

(Source : the Bell, AUM in USD $mn and Performance in %)

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v - c) Funds with 3 ~ 5 years since inception

Inception AUM Performance Performance


Rank Fund Name Main Strategy PBS
Date (Jun 2018) (Jan – Jun 2018) (Since Inception)

NH Investment &
1 Anda Cruise Fund No.1 15 May 14 Multi Strategy $187.0 5.83 57.79
Securities

Korea Investment
2 Midas Red Hare Fund No.1 10 Oct 14 Multi Strategy $133.9 5.33 57.63
& Securities

Shinhan BNPP Korean Equity Mirae Asset


3 18 Oct 13 Equity Hedge $54.4 3.21 40.09
Long-Short Fund No.1 Daewoo

Samsung H Club Equity Hedge NH Investment &


4 16 Aug 13 Equity Hedge Securities $37.6 2.38 31.12
Fund No.2

Samsung H Club Hybrid Fund NH Investment &


5 24 Oct 14 Multi Strategy Securities $74.2 1.04 18.30
No.1

Samsung
6 Quad Definition 3 Fund No.1 22 Oct 14 Equity Hedge $27.8 -0.46 4.33
Securities

Truston Top Gun Multi-Strategy Korea Investment


7 16 Dec 13 Equity Hedge $25.9 -4.39 -10.01
Fund No.1 & Securities

(Source : the Bell, AUM in USD $mn and Performance in %)


(Total number of funds meeting the criterial was less than 10)

v - d) Funds with 5+ years since inception

Inception AUM Performance Performance


Rank Fund Name Main Strategy PBS
Date (Jun 2018) (Jan – Jun 2018) (Since Inception)

Samsung H Club Multi-Strategy Mirae Asset


1 17 Feb 12 Multi Strategy $30.5 3.84 48.34
Fund No.1 Daewoo

Samsung H Club Opportunity NH Investment &


2 23 May 12 Multi Strategy $52.3 3.75 46.85
Fund No.1 Securities

Samsung H Club Equity Hedge Mirae Asset


3 16 Dec 11 Equity Hedge $182.5 2.60 50.54
Fund No.1 Daewoo

Mirae Asset Smart Q Arbitrage NH Investment &


4 04 Jun 12 Fixed Income $392.3 2.35 27.75
Fund No.1 Securities

Samsung H Club Total Return Mirae Asset


5 21 Dec 12 Fixed Income Daewoo $44.0 1.11 12.60
Fund No.1
Mirae Asset
6 Kyobo AXA Magnum Fund No.1 27 Feb 12 Equity Hedge Daewoo $136.0 0.37 23.51

Mirae Asset Smart Q NH Investment &


7 16 Dec 11 Others $20.9 -0.75 18.84
Opportunity Fund No.1 Securities

Hi Powerful Fundamental Long- Mirae Asset


8 28 Dec 12 Equity Hedge $34.0 -6.33 24.45
Short Fund No.1 Daewoo

Samsung
9 Brain Taebaek Fund No.1 19 Mar 13 Equity Hedge $112.1 -16.17 -5.39
Securities

Samsung
10 Brain Baekdoo Fund No.1 17 Sep 12 Equity Hedge $48.1 -16.23 13.46
Securities

(Source : the Bell, AUM in USD $mn and Performance in %)

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vi) Key Regulation Overview

Hedge-fund related key regulation changes in Korean market are summarized below

vi - a) Revision of Capital Market Law (Effective from Jul 2018)

Jul 2018 revision eased access of non-institutional investors and fund of funds to private equity and hedge fund
entities.
• Granted permission for establishment of fund of funds structure specialized in private equity and hedge fund
by increasing its maximum exposure limit to private equity and hedge fund from 50% to 100%
• Eased access of non-institutional investors’ access to hedge funds by capping the minimum investment
requirement for the newly proposed fund of funds structure at USD $5,000

vi - b) Revision of Capital Market Law (Effective from Oct 2015)

Oct 2015 revision eased establishment and investment regulations of private equity and hedge fund entities and
reduced minimum ticket size required for investors to the entities.
• Changed the establishment of private investment fund to be effective from approval to reporting basis,
significantly reducing the processing time
• Relieved the hedge fund minimum requirements: min. AUM from USD $6mn to USD $2mn, and portfolio
managers no longer required to have min. 2 years of hands-on portfolio management experience (min. 3
years of finance related working experience is still required)
• Eased access of investors’ access to hedge funds by reducing the minimum investment requirement for hedge
funds from USD $500,000 to USD $100,000
• Increased maximum leverage and relieved the regulations related to utilization of free cash
• Removed maximum exposure limit per sector for hedge funds, granting greater freedom of investments

vi - c) Revision of Capital Market Law (Effective from Dec 2011)

Dec 2011 revision gave birth to the hedge fund market in Korea and outlined basic criteria.
• Granted permission for establishment of hedge fund structure
• Minimum AUM required was USD $6mn, and minimum 3 portfolio managers with min. 3 years of finance
related working experience and 2 years of hands-on portfolio management experience were required
• Minimum investment required per investor was at USD $500,000
• Below is the summary of an important regulation regarding capital raising
- Funds can organize capital raising pitch to maximum of 49 investors. There is no regulation regarding
the maximum number of actual investors.
- Once the fund pitches to 49 people, currently no method is available for funds to raise additional capital.
This is the reason behind average fund AUM getting smaller and funds establishing many variations such
as Fund no.1, no.2, etc.

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