On February 26, 2015, South Korea’s National Pension Service (“NPS”), the world’s third largest pension fund with $426 Billion in AUM (as of November 2014), decided to allocate 0.5%, $2.1 Billion, to hedge funds. The allocation could begin as early as the end of this year, finally finding an agreement to the proposition that was first addressed to the fund operation committee in 2008. NPS, grown from about $500 million in 1988, is expected to expand to $2.2T within 30 years, according to Mr. Choi, NPS's executive.

As reported by local news sources in Korea including Asiae, MK, MT, and Hankookilbo, it appears that NPS will first invest in multi-strategy Fund of Hedge Funds and then expand into the larger hedge fund universe to find differentiated returns and reduce the risk of their portfolio comprised of traditional investments: stocks, bonds, real assets and private equity.


Source: National Pension Fund Investment Office, as of end of 3rd Q. 2014

In addition, news outlets write that NPS intends to look at larger and more established foreign hedge funds in the beginning, and prioritize transparency and strong risk management system during their manager selection process to mitigate with the risk associated with investing in hedge funds.

Historically, NPS has invested in foreign alternative asset classes through its commitment to real estate, infrastructure and private equity via either direct or fund investments. Foreign Alternatives has had smaller allocation than Korean alternatives until 2013; however, as of Q3 2014, Foreign Alternatives comprises 51% of the alternative investments allocation and 4.8% of the total AUM.


Source: National Pension Fund Investment Office, as of end of 3rd Q. 2014

North America had the largest foreign alternatives allocation from NPS with 34.4%. Real estate accounted for 55.8% of the total foreign alternatives asset allocations.


Source: National Pension Fund Investment Office, as of end of 3rd Q. 2014

According to NPS’ website, this allocation to alternatives will mostly be at the expense of their exposure to local fixed income asset class. In fact, Korean bonds constitute 55% of the fund’s total asset allocation. In 2014, NPS announced that they will be hiring more investment professionals to increase allocation to direct public equity investments (Bloomberg). NPS is now launching their hedge fund allocation program within alternatives. NPS hopes to diversify their risks by reducing their exposure to local fixed income asset class, and increasing their exposure to equity and alternatives asset classes.

Our research on asset allocation of 36 U.S. Public Pensions suggests that their asset allocation to fixed income has decreased from 32.45% in 1995-01 period to 23.7% in 2011-13 period.


Source: U.S. Public Pension Funds

What’s ahead for Korea’s NPS? Would their asset allocation strategy look something more like the strategy of U.S. pension funds? Time will only tell.

Written by: Henry Hwang, Tony Oh and Les Baquiran