Key Takeaways
- • Korean alternative investments totaled 260.3 trillion won ($234.3 billion) in 2015, more than fourfold their 2006 level, according to the Bank of Korea.
- • Alternative investments rose to 16.7 percent of Korea's GDP at end-2015, up from 10.6 percent in 2006.
- • Infrastructure/public-private partnerships make up the largest share of alternative assets at 39.5 percent, followed by real estate at 22.6 percent.
- • Pension funds, led by the National Pension Service, are the largest investor base, and alternatives account for an average 10.7 percent of local pension portfolios, per the Korean Capital Market Institute.
- • Securities firms are competing to hire alternative investment specialists, and recently announced government measures to ease alternative investment regulations are expected to direct more capital into the asset class.
Summary
Investors in South Korea are increasingly moving away from traditional bonds and equities toward higher-yielding alternative investments such as private equity funds, real estate and infrastructure, as the benchmark interest rate has fallen to a record-low 1.25 percent. According to the Bank of Korea, alternative investments totaled 260.3 trillion won ($234.3 billion) in 2015, growing more than fourfold from 2006. Their share of the country's gross domestic product rose to 16.7 percent at the end of 2015 from 10.6 percent in 2006.
Lee Jeong-wook, who led the central bank's research into alternatives, attributed the demand to investors' appetite for high-yield products amid low rates, and noted that an aging population is pushing investors toward long-term portfolios. Pension fund operators, including the National Pension Service, form the largest investor base, given the complex nature and long-term horizon of these assets. According to the Korean Capital Market Institute, alternatives currently account for an average 10.7 percent of local pension operators' portfolios, and large institutions are moving to increase that allocation. A researcher at the institute, Tae Hee, said pension funds abroad favor alternatives because they allow risk hedging through diversification while ensuring fair returns. The government recently announced measures to ease alternative investment regulations, which is expected to prompt investors to commit more funds.
The universe of alternatives has broadened to include ship vessels and art alongside hedge funds, managed futures and real estate. Infrastructure, or public-private partnerships, remains the largest category at 39.5 percent, followed by real estate at 22.6 percent. Traditionally favored office buildings are losing appeal; Kim Eun-ki, a researcher at NH Investment & Securities, said Seoul's offices are oversupplied with high vacancy rates, while large logistics centers are in high demand due to the boom in e-commerce. In response to the trend, securities companies have recently competed to hire alternative investment specialists.
Lee Jeong-wook, who led the central bank's research into alternatives, attributed the demand to investors' appetite for high-yield products amid low rates, and noted that an aging population is pushing investors toward long-term portfolios. Pension fund operators, including the National Pension Service, form the largest investor base, given the complex nature and long-term horizon of these assets. According to the Korean Capital Market Institute, alternatives currently account for an average 10.7 percent of local pension operators' portfolios, and large institutions are moving to increase that allocation. A researcher at the institute, Tae Hee, said pension funds abroad favor alternatives because they allow risk hedging through diversification while ensuring fair returns. The government recently announced measures to ease alternative investment regulations, which is expected to prompt investors to commit more funds.
The universe of alternatives has broadened to include ship vessels and art alongside hedge funds, managed futures and real estate. Infrastructure, or public-private partnerships, remains the largest category at 39.5 percent, followed by real estate at 22.6 percent. Traditionally favored office buildings are losing appeal; Kim Eun-ki, a researcher at NH Investment & Securities, said Seoul's offices are oversupplied with high vacancy rates, while large logistics centers are in high demand due to the boom in e-commerce. In response to the trend, securities companies have recently competed to hire alternative investment specialists.
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