DR.CHENJIAZI ZHONG

The Local Economy Growth

The GDP in South Korea achieved a 0.9 percent in the first quarter of 2012. Korea’s economy moved away from the centrally planned, government-directed investment model toward a more market-oriented one. Despite the fact that IMF lowered Korea’s economic growth outlook to 3.25% given the weakening global economy outlook in March, the activity is expected to expand at a moderate pace supported by Korea’s competitive export sector and the recently concluded EU and U.S. Free Trade Agreements.

Public debt is Under Control

Korea’s public debt has been kept at around 23.7% of its GDP, compared to 225.8% that of Japan, 76.5%, 60.8%, 58.9% that of UK, Brazil, and the U.S., respectively.

Conditions of Korea’s Capital Markets

Korea’s market capitalization increased more than five times to US$1 trillion during the period of 2001 to 2010, while its bond market grew more than three times to $1.2 trillion. There is still room for growth. In addition, policymakers aim to position the country as a financial hub in the region by 2015, and a few years ago, Korea passed sweeping financial market legislation in an attempt to consolidate and revitalize its capital markets.

Financial laws Amendment and a Favorable Environment for Hedge funds

The Capital Market Consolidation Act, which came into effect in February 2009, consolidated six capital markets laws and sought to enhance the competitiveness of Korean financial companies by expanding the scope of financial services companies. Hedge funds have been licensed to diversify the investment products in the country and develop the competitiveness in the global financial market.

Distinct Characteristics of Homegrown Hedge Funds:

1. Korean-style hedge funds have lower leverage and they cap leverage at 400% of the funds’ capital
2. They provide more information and relative transparency for domestic investors
3. The sector has a smaller number of specialists
4. The restrictions on debt may limit the ability of local hedge funds to carry out some of the common strategies that hedge funds elsewhere use to attain maximum return on investments, for instance, CTA (managed futures), and long/short equity.

Besides, regulators are expected to further relax regulation of the sector which will potentially boost rapid growth of the hedge fund market.

Strengthening Reporting Requirements

On July 27, 2011, the Financial Services Commission (FSC) of South Korea (South Korea’s SEC) made legislative notice of its proposal to revise the Enforcement Decree of the Financial Investment Services and Capital Markets Act (FSCMA). The proposal contemplates enhanced supervision and surveillance of South Korean hedge fund managers by the FSC, and enhanced reporting to the FSC by hedge fund managers.

Korean-Style Hedge Fund Performance

The industry’s initial returns will be the key factor for attracting future investment. For Korean hedge funds to take up 5-10 percent of local institutional investors’ portfolio, the hedge funds have to be able to post investment returns of 7-8 percent a year.