Korea’s Big Bang

Can Korea be the next financial hub for Asia?

Originally published in the March 2008 issue

A popular and familiar poster is the New Yorker map of the world (which was featured on the March 29, 1972 cover of The New Yorker magazine) depicting a New York City that dominates both the United States and the rest of the world. This image helps put into perspective the perceived historical importance of Wall Street to the global financial community.

The market deregulation, unbridled competition and financial heavyweights it created have arguably made Wall Street the world’s financial centre. This title rests in part on the fact that the rest of the world sends much of its investment capital to New York and US based firms for management. The irony is that much of this imported investment capital is then re-exported for investment in the same countries from where it was originally imported from.

Nowhere is this more evident than in Asia, where high savings rates, persistent and growing current account surpluses and burgeoning official reserves have made Asia one of the primary exporters of capital to the world and to the United States. These funds are subsequently re-exported for investment globally on behalf of these Asian investors.

Time for deregulation

Fully 90% of hedge fund investment in Asia comes from the US and Europe, but a substantial portion of this originally came from Asian institutional investors. It is not evident that there is meaningful value added having Americans investing for Chinese institutional investors in China. But this is changing. In recent years many global and Asian countries have undergone their own deregulation processes in an effort to assume part of the mantle of global or regional financial centre. It now appears to be Korea’s turn.

Big bang is coming to Korea. Korea is endeavouring to transform its historically insular country into an Asian financial hub in its determination to follow the financial deregulation big bangs of London and Tokyo. It will attempt to compete for market share of regional finance with Shanghai, Hong Kong, Tokyo and Singapore. At this point it is not clear how successful these reforms will be, but the Koreans are determined, and it is clear that Korea’s ‘Big Bang’ reforms will radically alter its financial marketplace.

Korea’s big bang follows the 1986 Thatcher government-led deregulation and reform programme that led London to become a global centre of finance and a 2 decade long economic boom. It also follows the less successful Japanese big bang in the late 90’s; and the less ambitious but more effective programmes in Singapore and Hong Kong to attract financial services businesses and to become regional hubs.

Korea’s attempt at big bang is based on the Capital Markets Consolidation Act (CMCA) which passed Korea’s national assembly last July and will take effect in February 2009. CMCA involves some basic shifts in the existing regulatory framework. First it will move the regulatory regime from ‘positive’ regulations to ‘negative’ regulations. The new regime allows for anything that is not expressly prohibited. This change and flexibility will allow for more product development and innovation. Additionally, there will be a move from company-based regulation to functional regulations. For example, investment banks will be able to engage directly in additional business such as asset management.

Most importantly for the alternative asset management industry, MoFE will make it easier for hedge funds under CMCA framework. According to the Asset Management Association of Korea, the new legislation will bring “new changes and innovations” by opening up new investment possibilities. “Investors will have a much broader array of funds to choose from, ranging from US-style hedge funds to funds investing in exotic assets.”

CMCA will have a positive influence on various alternative products sold in Korea because the regulations would be more favourable and the market is eagerlyanticipating new products to launch on the verge of CMCA. According to the Korea Times, the Korean government will allow the establishment of hedge funds in 2009 to help upgrade the country’s financial industry and boost its growth potential.

Outside of Korea, the Asian hedge fund industry has been growing rapidly. According to Eurekahedge, in 1999, there were only 162 hedge funds in Asia with less than US$14 billion of assets. Now there are more than 500 hedge funds with the estimates of hedge fund assets ranging from almost US$60 billion to $200 billion under management. Of this amount, hedge funds investing in Korea are estimated at only US$24 billion. To date, most hedge funds (even those investing in Korea) are located in Japan, Singapore and Hong Kong. If Korea’s MOFE has its way and CMCA is successful, there will be many more hedge funds in Asia, and Korea will be a regional centre for them.

Although CMCA doesn’t take full effect until early 2009, several Korean firms are already positioning in anticipation of the new regulatory regime. Initiatives are planned by Woori Investment & Securities (a Southeast Asian focused hedge fund), Hana Daetoo Securities (a fund of funds investing in Korea focused hedge funds), and Mirae Asset Management.

Perhaps the most interesting and ambitious of all these initiatives is a joint venture involving Korea Investment Holdings (KIH). KIH teamed up with Atlas Capital Management, a US based alternative investment manager, to form K-Atlas and the K-Atlas fund.

New York’s role in the world financial market is changing; its role is diminishing. Asia’s role in the financial markets is ever-increasing. Korea will be opening up. Korean capital will be coming home. If MOFE is successful with CMCA, Korea will become a financial hub for Asia. And if firms like KIH’s K-Atlas execute their business plan, Korea will become a significant hedge fund and alternative investment player.

Regardless of what happens, the Korean and Asian financial landscape will become forever changed, come next February.

K-Atlas and the K-Atlas Fund

K-Atlas is a Singapore-based manager of alternative investment funds, and the K-Atlas Fund, is US$100 million Singapore-domiciled alternative investment fund targeting hedge fund and private equity investments.

K-Atlas intends to create, manage and bring attractive and differentiated international private equity and hedge fund products to Korean institutional and high net worth investors.