InfoAnda - Korean derivative funds rebound sharply; risks eyed

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Yahoo! My Yahoo! Mail More Yahoo! Services Account Options New User? Sign Up Sign In Help Yahoo! Search web search Home Singapore Asia Pacific World Business Entertainment Sports Technology Singapore Asia Pacific World Korean derivative funds rebound sharply; risks eyed Reuters - Tuesday, December 15 Send IM Story Print * Equity-linked funds post big performance turnaround in 2009 * Among top performers in Asia this yr; some up over 300 pct * Some concerns raised on the risks they bring By Kim Yeon-hee SEOUL, Dec 14 - Eye-popping returns this year from a small but volatile segment of South Korea's $300 billion mutual funds market are reigniting investor interest, and also stoking concern at the country's regulators. Equity-linked funds , which invest mostly in derivative instruments called equity-linked securities, are back with a bang in 2009 after suffering a rout last year in the global financial crisis. Dozens of such funds have been launched by Korean money managers just this month itself. New issues of the underlying instruments, equity-linked securities , is also up. New ELS issues by brokerage firms, including Macquarie <MQG.AX>, Samsung Securities <016360.KS> and Woori Investment & Securities <005940.KS>, had risen to 1.3 trillion won in August from 95.8 billion won in November 2008, Financial Supervisory Service's data shows. "They will be more popular next year, now that investors have regained confidence about stock markets," said Oh Dae-jung, who leads Daewoo Securities' asset-allocation team, referring to both ELFs and ELS. ELS-investing funds are structured to outperform stock market indices when their underlying stocks meet certain set conditions. But those features also make them vulnerable to bigger losses in volatile markets. The stocks are mostly limited to large ones, including Samsung Electronics <005930.KS>, KEPCO <015760.KS>, Shinhan Financial Group <055550.KS> and Woori Finance Holdings <053000.KS>. A number of the ELFs have posted triple-digit returns so far this year, according to fund-tracking firm Lipper, and are among Asia's top performers. Lipper is a unit of Thomson Reuters. The $17 million SH Asset Best Twin-Power Derivatives SH-2 fund of Shinhan BNP Paribas Asset Management has returned 352 percent in 2009, after losing 66 percent last year. Its underlying ELS were those of Shinhan Financial and Hyundai Motor <005380.KS>. Four other ELFs have returned more than 300 percent. A bigger fund, the $333 million KB Korea ELS Private Placement Derivatives 2, returned 229 percent. RISKY? Prospects of steady gains for Seoul's equity market <.KS11> next year will increase the appetite for them from individuals and small-sized institutions, which avoid stocks but want returns higher than the 3-5 percent offered by banks, said Daewoo Securities' Oh. New launches are the only way to satisfy investor demand in ELFs as most of them are close-ended but do not trade on stock markets. They are lucrative for fund houses to launch, bringing in about 1.5-2 percent in sales commissions and management fees, compared with the 1 percent for traditional equity funds. About a dozen fund companies, mostly domestic, offer ELFs, out of the more than 60 asset managers operating in South Korea. Shinhan BNP and Woori Asset Management are among the leading ELF players. There were 2,369 ELFs in Korea at the end of November, with assets of 10.8 trillion won , according to the Korea Financial Investment Association. These funds expanded their presence strongly in Korea between 2005 and 2007, before being punctured by the financial crisis. The losses of a Woori Asset Management's derivatives fund has also lead to lawsuits. Those experiences are still keeping some investors wary. "We have no plan to invest in ELFs again for the time being," said a capital markets official at a leading mutual savings bank in Seoul, which had put about 10 billion won in ELFs before redeeming them by paying a penalty in July. "It looks too risky and takes a long time to recover once it plunges," he added, asking not to be named because he was not authorised to speak to the media. Regulators, who earlier this year tightened rules for investing in ELS, are also closely watching the segment's rebound. "Investors, who have been burned with big losses from those funds have now awakened to the risks," said an official at the regulatory FSS. "They need to weigh and analyse those funds before buying them." 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