Korea Capital Market Institute

Due to the low interest policy keep going globally, for the institutional investor like Defined Benefit(DB) pension schemes or life insurance companies which have the fixed cash flow of liability, the necessity of investment diversification began to emerge. The purpose of searching for new investment item is keeping diversification effect in financial crisis rather then improving rate of return. In this background, the majority of local institutional investors are keen to increase the ratio of Alternative Investment(AI), instead cutting of traditional investment in their Strategic Asset Allocation(SAA). Among the various types of AI, they are increasingly interested in hedge fund in specialty. The reason is that hedge fund seek for absolute return even though in a global financial crisis situation and can protect down side risk. However, institutional investor including public pension fund are having difficulties include hedge fund to their investment portfolio because of the misconception that hedge fund would be highly risky asset. Hedge fund, however, has very wide variety of investment strategy, among those some are high-risk high-return profile but in general, the hedge fund can be a kind of AI with medium-risk medium-return. Another issue having difficulties to take hedge fund is that it seeks for excess return generated from fund manager`s idiosyncratic skills rather than well diversified market return. Therefore, operating and management hedge fund requires distinctive know-how from traditional investment. Global hedge fund market has been on a very fast recovery around institutional investors since the financial crisis in 2008. However, the physical growth of hedge fund industry expects to be limited as the US and EU have reinforced financial regulation over the Investment Bank(IB). Nevertheless, the ratio of hedge fund in Strategic Asset Allocation for global institutional investor expects to increase steadily. In the introducing stage of Hedge fund, generally starts off investment using Fund of Hedge Fund(FoHF) and once internal competencies are accumulated, then Single strategy hedge fund is recommended to step up. But in cases, operational risk of FoHF can boost up due to the difficulties of daily monitoring. Thus, when it comes to large pension fund that has big enough initial investment scale, the parallel investment strategy of single hedge fund from the introduction stage needs to give positive consideration. Among the various investment strategy of hedge fund, equity hedge type tends to be preferred in the introduction stage as it is accustomed to current fund manager. But the optimum decision of investment strategy should be decided by how much diversification effect can be maximized with current portfolios which institution have. Not Single hedge fund but in using FoHF, decision making what to choose of investment style is necessary. In case of institutional investor requires security, conservative investment style is recommended to be proper one.