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 long-term investor to secure illiquidity premiums, regardless of the market direction and volatility.
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 2017, KIC had recorded an annualized investment return since inception of 7.37% for alternative investments. 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 absolute returns.
We implemented various new strategic investments, including a sector strategy in 2017, and entered into additional agreements with a select group of outstanding management firms for subsequent funds. We strived to increase our portfolio returns by continuously finding opportunities for joint and direct investment.
We also strengthened the management of portfolio concentration risk by rebalancing our portfolio and are building a private equity data management platform to manage and monitor investment assets more effectively.
Following the opening of KIC’s Singapore office in September of 2017, we dispatched a private equity manager there to strengthen our Asia network and find investment opportunities in the region, which is noted for its high-growth potential.
Real estate and infrastructure are leading tangible 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.
KIC pursues solid growth in its real estate and infrastructure portfolio by strengthening portfolio management and pursuing the regional and strategy-specific diversification of new investments.
For real estate investments, we proactively made diverse direct and indirect investments as well as joint investments in North America, Europe and Asia. We expanded investments further in such sectors as residential properties for rent and logistics facilities based on market conditions. For infrastructure investments, we pursued balanced investment between advanced markets and emerging markets, as the portfolio has continued growing due to multiple new investments.
Hedge funds, due to their relatively low correlation with economic cycles and financial market volatility, deliver absolute returns, offer a wide range of investment strategies and techniques and exhibit high capital efficiency.
Hedge fund investments adopt a variety of tactics and strategies, which can be classified largely as equity long-short, global macro, commodity trading advisors, fixed-income and event-driven strategies. We aim to diversify our investments across multiple hedge fund strategies to achieve sustainable long-term profitability.
Despite the relative underperformance of the overall hedge fund industry in 2015-2016, we generated solid returns centered on global equities and risky assets, such as emerging market currencies, as the global economy exhibited a clear turnaround in 2017.
Our equity related event-driven strategy, in particular, reported outstanding performance from continued strength in global equity markets and an active M&A market. The global macro strategy also benefitted from the recovery of asset values in emerging markets. On the other hand, CTA performance was weak due to rapid fluctuations in the prices of oil and other commodities.
In mid-2017, we spun-off hedge fund investments from the External Management Team and created an independent hedge fund section to further strengthen KIC’s presence in the global hedge fund market. With this new section, we reestablished our mid- to long-term hedge fund management plan and strategy to enhance the overall portfolio’s stability and profitability in a fast-changing macro environment. We also carried out portfolio rebalancing based on a thorough assessment of existing managers and continued seeking new outstanding managers to improve the long-term profitability of our portfolio. Hedge fund investments, with their low correlation to not only traditional assets but to other alternative assets such as private equity and real estate, deliver complementary return streams to other assets and, in the long term, enhance KIC’s sustainable profitability.