It has been found that Samsung Securities withdrew its application for registration as a hedge fund operator last month and HMC Investment Securities decided to put off its registration as a hedge fund operator more recently. Earlier, Shinhan Investment Corporation made the same decision as HMC Investment Securities late last year. This is quite contrary to the situation that occurred in August last year, when the Financial Services Commission of South Korea allowed local securities companies to run hedge funds. At that time, a large number of securities companies said that they would participate in the hedge fund market.
The recent trend is because of a low rate of return and concerns over the exposure of their investment strategy. For example, Taurus Investment & Securities’ two alternative investment funds launched in November last year recorded a cumulative rate of return of negative 34.9% and negative 35.56% as of February 7 this year. The figure is negative 1.41% in the case of NH Investment & Securities’ NH Absolute Return 1 launched in August last year, 6.11% for Korea Asset Investment Securities’ Korea Asset Classic Public Offering Fund 1 and 0.04% to 5.37% for Shinyoung Securities’ three hedge funds, which are relatively lower than the rates of return of other similar funds.
“The lower rate of return means that a successful sale is unlikely and we have no reason to start the business,” said a local securities company that recently decided not to enter the market. “For a securities company to start a hedge fund business, it has to spin off its division handling its identifiable assets, and then its asset management strategy is exposed to the outside,” a hedge fund operator explained, adding, “South Korean securities companies are trying to avoid it with the estimated rates of return of their hedge funds remaining at a low level.”
Another obstacle is the nature of the hedge funds provided by securities companies, that is, the likelihood of their being unwilling to handle the others’ products with most hedge funds being available via securities companies. Banks can sell multiple securities companies’ hedge funds but the sale via banks is insignificant as they lack the understanding of hedge funds and they are associated with most securities companies. Last year, the Korea Development Bank was the bank that posted the largest hedge fund sale in South Korea, 2.68 trillion won (US$2.28 billion). This amount is only 7.3% of what Korea Investment & Securities recorded during the same period.