FSC opens door to new funds

The Financial Services Commission (FSC) announced on Sunday that it will allow public offering funds to be indirectly invested in private equity funds (PEFs), active exchange-traded funds (ETFs) and funds related to real assets.

At the fourth meeting of the committee on financial reforms on Thursday, the financial regulator confirmed a series of measures that will allow the adoption of new, innovative fund products that offer higher yields and serve as vehicles to increase wealth.

“One of the most likely effects is that the measures will allow individuals to seek higher yields from various PEFs, providing them useful investment tools in the era of low interest rates,” the FSC official said. “The real estate-linked funds will help diversify investment portfolios, increasing investment in a wide range of buildings, from hotels and officetels to public rental houses and also in social and energy infrastructure.”

The focus of the FSC reform initiatives in the second half of this year is to boost the capital market and help people accumulate wealth amid prolonged low interest rates.

The FSC said that the Korean fund market is falling behind changes in the global fund market, where investments switch from traditional assets, such as stocks, to real estate, and from active investments to passive, asset allocation investments. Koreans’ investments in fund products are significantly low compared to other countries.

“Due to stiff regulations, launches of creative fund products are limited,” the regulator noted.

Individuals are banned from directly investing in PEFs in Korea, making it impossible for retail investors to seek high yields. Although demand for high-risk products is on the rise amid low interest rates, public offering funds investing in PEFs are highly restricted.

“Being aware of the problems, the FSC has come up with measures to add innovation in a variety of fund products and increase individuals’ access to them, considering the changing needs in the current financial market,” said Kim Tae-hyun, director general of the capital market bureau at the FSC.

To increase the variety of fund products in the local market, the FSC decided to introduce public offering funds that invest indirectly into PEFs such as hedge funds.

Due to the current requirement of a minimum 100 million won ($85,000) investment in PEFs with a leverage ratio of 200 percent or less, individuals have been limited to PEFs. For those with over 200 percent in leverage, 300 million won is the minimum.

With the market demand for greater access to PEFs, the FSC will allow the creation of public offering funds that make indirect investments into PEFs. The minimum amount allowed for entry is 5 million won, the FSC said. A public offering fund product will be designed to invest in one PEF up to 20 percent of its total value.

The regulator will also introduce active ETFs. Currently, the Korean financial authority allows only indexed ETFs that are highly linked to the performance of the Kospi 200.

To diversify ETF products, the FSC decided to let in active ETFs with yields that are determined by fund managers’ discretion, including decisions on investment items and sale and buying timing. Active ETFs seek higher profits than indexed ETFs.

The regulator will also revise standards for evaluating fund derivatives’ risk to allow introduction of more innovative fund products.

“The risk assessment standards are too conservative,” the FSC said. “They are not aligned with global trends, while they lack accuracy in measuring risk.”

The FSC will improve the standards for gauging risks of options, swaps, counter and hedge trading in accordance with the standards of Europe and the United States.

For equity-linked securities (ELS), the authority will allow direct investment by individuals without the current requirement of expert advice, while boosting investment in exchange-traded notes (ETNs). ETNs are considered simpler and easier to understand than ELS products. Some public offering funds will also be allowed to invest in ETNs.

Public offering funds that can connect fund yields with values of real assets such as property will also be introduced to individuals. So far, real estate and other material assets have been limited to PEFs and largely attracted institutional investors.

The FSC will create public offering funds specializing in such real assets and grant access to individuals. The regulator will amend the acts on the public offering fund to legalize the change.

The regulator will also consider allowing companies with a single purpose of investing in real asset-based PEFs in Korea to be established. Like Master Limited Partnership and Business Development Company in the United States, Korea may have investment companies operating funds investing in real estate and other assets.

BY SONG SU-HYUN [song.suhyun@joongang.co.kr]