Money flows into alternative funds slow; regulator to up monitoring

Capital inflows into alternative investment funds in South Korea have slowed sharply so far this year compared with a year earlier due to coronavirus, and could take another hit from regulatory moves aimed at tightening screening of alternative investments.

A total of 10.3 trillion won ($8.5 billion) in fresh money has flowed into both private and public alternative funds since the start of the year, about one third of the amount funneled into those funds in the same period last year, according to the Korea Financial Investment Association (KFIA) last week.

Failure to conduct due diligence on target assets since the coronavirus outbreak led to suspension or delay in new alternative investments, amid growing uncertainties over alternative assets which are less liquid than traditional investments.

The accumulated amount of the alternative funds came to 240 trillion won as of June 11, an increase of 4.5% compared with the end of last year. Half of them represent overseas investments, with the numbers excluding direct alternative investments made by domestic institutions.

As South Korea’s alternative investment fund market has trebled in value over the past five years, the regulatory Financial Supervisory Service (FSS) launched a task force last week to draw up guidelines for risk management on alternative assets, said a senior FSS official.

The task force is composed of members from 10 institutions, including asset management companies and brokerage firms.

The guidelines in the works will cover the entire process of alternative investment from deal sourcing to post-deal management.

FSS is also planning to introduce a monitoring system for shadow lenders that help finance alternative investments, FSS’ capital market supervision department chief Kyung-sik Lee told a symposium on June 12.

“In regards to value assessment, our principle is to consistently apply one assessment method for each asset class. But we will also allow them to adopt their own methods only when they have reasonable grounds,” he said in the symposium entitled “Pension funds’ alternative investments: value assessment and risk management.”

It was hosted by Korea Capital Market Institute and Korea Finance Association.

To set the guidelines, FSS will collect detailed data on alternative investments made by domestic institutions and their exposure to each asset.

The rapid increase in alternative investments by domestic institutions led to heated competition and valuation inflation, which in turn weighed on their performance, Lee added.

As a panelist at the symposium, the Public Officials Benefit Association’s CIO Dong-hun Jang said that aggressive investment would help spread out risk, given that pension funds have been diversifying into various asset classes and hiring top-performing general partners as part of a risk management effort.

Jang advised that uniform guidelines, if adopted, should not hamstring their efforts to make creative investments across broader geographies.

Write to Jung-hwan Hwang and Hyun-il Lee at jung@hankyung.com