Systematic Monitoring Needed
Some industry sources say that the government should unify alternative investment supervision regulations for domestic institutional investors and come up with systematic monitoring systems.
According to a report entitled “Current Status and Implications of Alternative Investments in Korea” published by the Bank of Korea (BOK) on August 3, the volume of alternative investments made by domestic institutional investors stood at 260 trillion won (US$232.56 billion) as of the end of 2015, which was 4.2 times higher than the 61.4 trillion won (US$5.49 billion) recorded in 2006. Alternative investments took up 16.7 percent of the country’s gross domestic product (GDP), up 10.6 percent point, over the same period.
An alternative investment is an investment in asset classes such as indirect investments, including public-private partnerships (PPP), real estate funds, real estate investment trusts (REITs), special assets funds, private equity funds (PEF) and hedge funds, other than traditional investment assets like stocks and bonds.
Of the total alternative investments, PPPs accounted for 39.3 percent, while real estate funds and REITs made up 22.7 percent and 6.9 percent, respectively. Special assets funds took up 15.5 percent, and PEFs and hedge funds accounted for 14.3 percent and 1.3 percent, respectively.
Insurance companies and banks had a higher share in loans and funds which are relatively safe. On the other hand, asset management firms had a higher share in investments. They mostly invested in domestic assets but they are moving to increase the portion of their portfolios taken up by alternative investments, mainly pensions.
The BOK said that domestic institutional investors’ alternative investments have limited system risks but risks for overseas alternative investments are expanding. This is because institutional investors failed to directly manage them due to lack of professional experts and made more indirect investments through asset management companies. In fact, the portion of indirect investments made by insurance firms through asset management firms among overseas alternative investments increased from 39.3 percent at the end of 2013 to 50.7 percent at the end of September last year.
An official from the BOK said, “When asset management companies manage overseas alternative investment funds, there is a low rate of hedge which means higher hedge risks. Just like the Alternative Investment Fund Managers Directive (AIFMD) adopted by the European Union, we need systematic data collection and monitoring systems.”