Hedge funds grow dramatically in 3 years to W2.7 trillion

By Chung Ah-young

The nation’s hedge funds have dramatically risen over the last three years, attracting 2.7 trillion won as of November ― a 12.5-fold increase from 200 billion won in 2011, the financial regulator said Thursday.

The Financial Supervisory Service (FSS) added that the number of hedge funds has risen to 32 from 12 three years ago, with the number of asset managers rising to 21 from 13.

A hedge fund is an investment vehicle that pools money from a number of investors to invest in securities and other instruments, seeking high returns using sophisticated investment methods such as short selling and leveraged buyouts.

The government allowed domestic hedge funds in 2011 amid growing demand for alternative investment vehicles that diversify investment portfolios for Korean investors. Previously, Koreans had to invest in overseas hedge funds.

In the early period, the funds relied on financial firms’ investments but have drawn investments from wealthy individuals and corporations recently, the FSS said.

Local hedge funds generated low returns in the initial stage, but began showing stable returns from 2013.

Hedge funds that post positive returns account for 78 percent of the total in the 11 months of this year, up from 81.5 percent in 2013 and 50 percent in 2012.

Hedge funds' average return was 4.8 percent for the first 11 months of the year, higher than the 1.5 percent from the benchmark KOSPI and 1.4 percent from stock mutual funds.

“If pension funds and institutional investors are allowed to expand their investments later, the local hedge funds industry will continue to grow,” the FSS said in a statement.

However, the FSS pointed out that some 63.8 percent of the hedge funds are concentrated on equities and bonds. Only two hedge funds target foreign shares.

“To keep the industry’s growth, investments strategies should be more diversified,” the FSS said.