South Korea’s biggest public pension fund is taking a bolder approach to getting exposure to overseas hedge funds.
In the fourth quarter of 2019, the National Pension Service (NPS) added four alternative asset managers – Crabel Capital Management, Marshall Wace, Pentwater Capital Management and Waterfall Asset Management – to its list of external managers for its overseas hedge funds allocation. This brought the total number of its external managers for such investments to six.
The move coincides with a recent change in the pension fund’s way of investing in hedge funds.
The NPS’ first investment in overseas hedge funds dates back to 2016, when the pension fund sought to improve diversification. It has since maintained its exposure to the asset class by investing in funds of funds – vehicles that allow investors to bet on various hedge fund strategies, rather than risking everything on a single fund.
The NPS committed total $1 billion to funds of hedge funds run by BlackRock and GCM Grosvenor. As of the end of December 2018, the fair value of this investment was roughly 1.16 trillion won, accounting for 1.5 percent of the pension fund’s alternative assets and 0.2 percent of the pension fund’s total assets. The return on the investment in hedge funds was 3.2 percent on a Korean won basis, with exposure to macro, equity, event driven and relative value strategies.
After four years of investing in funds of funds, the NPS decided last year to invest in single hedge funds in an effort to enhance the net return. The NPS has a 0.5 percent target allocation to hedge funds, with about 0.2 percent already allocated to funds of hedge funds. Going forward, it plans to focus on investing in single hedge funds to meet its target allocation.
The NPS expressed growing concerns about the fee structure. It said in its meeting minutes, “The fund of funds model is advantageous in an early stage of investing in hedge funds but… also means an investor pays both the fees charged by the fund of funds and the fees charged by the underlying hedge funds.”
The pension fund’s investment in overseas hedge funds stood at 1.26 trillion won as of the end of June 2019, accounting for 1.6 percent of allocations to overall alternative assets. This is a fraction compared to overseas real estate (23 trillion won) and overseas private equity (20 trillion won), but the pension fund’s allocation to hedge funds is expected to grow gradually in the future.
The move by the NPS seems to follow the pattern of overseas asset owners. For instance, Singaporean sovereign wealth fund GIC and the Australian Future Fund invest both in funds of funds and single hedge funds. On the other hand, Dutch pension fund manager APG and the Canada Pension Plan Investment Board (CPPIB) have their exposure to the asset class only through investments in single hedge funds.
(By reporter Han Hee-yeon)