Doubts Increase on Korea Hedge Fund Deregulation

BusinessWeek – Some participants in South Korea’s nascent alternative-investment market have grown pessimistic over the ability of incoming legislation to support the development of an onshore hedge funds industry.

The Capital Markets Consolidation Act will become effective in February. It is a sweeping attempt to give Korea a securities law akin to those in the United Kingdom or Australia, in which financial services are regulated by function rather than by business license, and in which most types of businesses will be thrown open to all kinds of financial institutions. It will allow the development of a universal bank and plenty of cross-selling.

As part of this, the Financial Supervisory Service has been keen to encourage the development of an onshore hedge funds industry. There are a growing number of Korea-focused hedge funds, but nearly all of them operate offshore, in Singapore, Hong Kong or the United States. The government wants to position Seoul as a financial hub for northeast Asia, and has seen how hedge funds have become a vital and welcome part of the milieu in places like Singapore.

The Consolidation Act makes no mention of hedge funds, however, and industry players have lobbied the Ministry of Strategy and Planning (what they call the Ministry of Economy and Finance these days) to address this. The government has responded by floating an amendment to the Consolidation Act that is expected to go before the National Assembly, probably in October. This amendment specifically addresses the ability of onshore fund managers to employ leverage.

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