Investing assets entrusted by the government, Bank of Korea and public funds in the global financial market
Our objective with alternative investments is to increase absolute returns as a longterm investor by securing an illiquidity premium.
With their low correlation with traditional investments, alternative investments can also increase risk-adjusted returns and diversify risk in the overall portfolio.
We started investing in alternative assets in 2009, with private equity, and have since steadily broadened our investment spectrum to include real estate, infrastructure and hedge funds, thereby building a balanced alternative portfolio. As of the end of 2018, KIC's annualized investment return since inception for alternative investments was 7.40%. We continue to strengthen our alternative investment capabilities by expanding our network with global sovereign wealth funds, pension funds and GPs to explore promising investment opportunities, including co-investments.
Private equity is categorized as an illiquid, growth-oriented long-term investment within the alternative asset portfolio, and thus seeks higher risk premiums than other asset groups. KIC established the alternative investment division in 2009 and started investing in private equity funds immediately following the global financial crisis. We began making direct private equity investments in 2010 and co-investments with GPs in 2011. In doing so, we have diversified our private equity investment portfolio and minimized market correlations, while seeking higher returns.
In 2018, we worked to improve long-term returns by pursuing the special situation strategy, by which we sought to enhance private equity portfolio returns by taking advantage of global economic uncertainties, and a global venture investment platform that invests in promising venture companies around the world. We also strengthened strategic partnerships with a select group of outstanding management firms by committing to their subsequent funds.
We have recouped our direct investments in healthcare and technology companies that achieved high growth and margin expansion. Our Private Equity Team also built, and is currently using, a data management platform to actively and efficiently monitor the portfolio.
Through our offices in New York, London and Singapore, we are growing our overseas investor network and working hard to improve returns by identifying opportunities for direct and joint investments.
Real estate and infrastructure are leading real assets that are ideal for hedging against inflation. They are optimal for long-term investments due to their large investment scale and the value-added opportunities they provide in accordance with economic growth. Demand for these assets from global institutional investors continues to grow because of their suitability for long-term investment.
In 2018, KIC’s existing portfolio achieved stable performance. We also carried out new investments diversified by region and strategy, which grew our real estate and infrastructure portfolios.
For real estate investments, we made a diverse range of direct, indirect and co-investments in North America, Europe and Asia. We adopted a private lending strategy that reduces the risk of falling real estate prices during economic slumps. We increased investments in sectors expected to benefit from social and economic shifts, such as demographic changes and growth in e-commerce. For infrastructure investments, we are building a diversified portfolio by region, including North America, Europe and Asia. We are investing in sectors including renewable energy, power plants, transportation and communication.
As an asset class that pursues absolute returns, hedge funds offer a wide range of investment strategies and techniques. From a risk-return perspective, they have a relatively low correlation with economic cycles, traditional assets and other alternative assets including private equity and real estate. As a result, hedge funds help improve the long-term stability of KIC’s overall investment performance by creating results that complement other asset classes in our portfolio.
Hedge fund investments adopt a variety of tactics and strategies, which can be classified largely as equity long-short, global macro, commodity trading advisors (CTA), fixed-income and event-driven strategies. We aim to diversify our investments across multiple hedge fund strategies to achieve sustainable long-term profitability.
In 2017, with the global economy showing signs of recovery, risky assets, led mostly by global stocks and emerging market currencies, generated satisfactory returns. Our equity-related event-driven strategy and global macro strategy also performed satisfactorily. But in 2018, concerns about trade conflicts and tight central bank monetary policies led to increased volatility in the equities and fixed income markets. Our equity-related strategies and global-macro strategies led to results below that of the previous year due to a large-scale stock market correction in the fourth quarter of 2018. The CTA strategy was the worst-performing hedge fund index in 2018, due to increased volatility, but KIC managers achieved relatively strong performance using a differentiated model.
In 2018, we also revamped our mid- to long-term hedge fund investment plan and strategy. We improved our portfolio management system to increase investment stability in a fast-changing macro environment. We carried out portfolio rebalancing to better reflect the competencies of hedge funds and improve long-term profitability, thoroughly assessing our hedge fund managers while continuing to seek new ones. In early 2019, we also expanded our hedge fund section, started in 2017, into an independent team called the Absolute Returns Team to strengthen KIC’s hedge fund investment functions amid financial market volatility.