By Lee Hyo-sik
Staff Reporter
A senior finance ministry official said Tuesday that the government will allow the establishment of hedge funds in 2009 to help upgrade the country's financial industry and boost its growth potential. It had initially planned to phase out regulations on private equity funds (PEFs) toward full admission of hedge funds in the domestic financial market by 2012.
Deputy Finance and Economy Minister Cho Won-dong said hedge funds will be set up in the country after local PEFs are allowed to establish subsidiaries abroad next year and invest in the overseas corporate and financial debt restructuring markets.
``We will draw up and unveil a roadmap concerning the establishment and operation of hedge funds here before the year's end after hearing opinions from diverse sectors,'' he said in a keynote speech at a public hearing Tuesday organized by the Korea Securities Research Institute.
Last month, the ministry said local PEFs will be able to establish offshore special purpose companies (SPC) in foreign countries, including tax havens, next year, and purchase the bad debt of foreign companies and sell it as corporate value goes up through the restructuring process.
Cho admitted that Korea lags behind Hong Kong and other rivals in introducing hedge funds and related advanced financial investment techniques to the market. ``But we will closely look into how other countries brought in hedge funds and study their regimes to minimize their potential shortcomings, while maximizing merits.''
A hedge fund _ typically open to only a limited range of investors _ practices arbitrage and buys and sells undervalued securities, trades options or bonds and invests in almost any market, if there is a good opportunity. These funds are usually exempt from direct regulation by regulatory bodies. It can increase financial market uncertainties by pursuing excessive short-term returns and herding to exploit fragile and underdeveloped markets.
The deputy finance minister said the introduction of hedge funds will provide new investment opportunities and promote the development of financial techniques, upgrading the country's financial market. ``Also, they will help local financial companies make inroads into foreign markets to develop new earnings sources and become globally competitive firms as the domestic sector has increasingly become saturated.''
He said the global hedge fund market will reach $2 trillion in 2009 and double to $4 trillion by 2013, stressing the country should create a market-friendly environment to foster home-grown funds and help them play an active role in such a huge market.
``Hedge funds will also inspire local financial firms to develop better investment and asset management skills, and help the nation become a Northeast Asian financial hub,'' Cho noted.