"Traditional Asset Diversification Effect Falters"...Institutional Investors Face Growing Dilemma

Hedging Stock Concentration and Interest Rate Risks
Defending the Downside with Hedge Funds and Alternative Investments

On the 10th, at the 'KBxAIMA Alpha Seoul' event jointly hosted by KB Securities and the Alternative Investment Management Association (AIMA) in Yeouido, Seoul, Younghwan Kim, Head of Alternative Investments at the Government Employees Pension Service (center), Kwangho Shin, Head of Alternative Solutions at Mirae Asset Global Investments (right), and Steven Lee, Head of Mingxi Investment Korea (left), are engaged in a discussion.

Recently, in the global financial markets, the traditional correlation between equities and bonds has broken down, as both assets have declined in tandem, leading to heightened uncertainty. As the traditional portfolio diversification effect is no longer functioning, there is analysis suggesting that investors should secure downside protection through alternative investments and hedge funds.

At the 'KBxAIMA Alpha Seoul' event held on September 10 in Yeouido, Seoul, co-hosted by KB Securities and the Alternative Investment Management Association (AIMA), Younghwan Kim, Head of Alternative Investments at the Government Employees Pension Service; Kwangho Shin, Head of Alternative Solutions Operations at Mirae Asset Global Investments; and Steven Lee, Korea Representative of Mingshi Investment, held a discussion on these issues.

Kim assessed, "The historically persistent negative correlation between equities and bonds has recently broken down and turned positive. Determining how to allocate assets has become a primary concern for all institutional investors." Shin agreed, adding, "In March of this year, when a geopolitical conflict erupted in the Middle East, the S&P 500 index dropped by 5 percent and the yield on the 10-year U.S. Treasury rose by 40 basis points (bp; 1bp=0.01%), leading to simultaneous losses in equities and bonds." He continued, "The diversification effect was entirely absent in this typical financial market shock scenario."

They emphasized that as traditional assets falter, the role of alternative investments, particularly global hedge funds that can defend against volatility and seek absolute returns, has become increasingly important. Shin explained, "Even in times of rising market volatility, funds employing market-neutral strategies using quantitative models or statistical arbitrage strategies achieved positive returns of 1 to 1.5 percent," demonstrating defensive capability with volatility just one-third that of the stock market.

He further stressed, "Hedge funds are not about timing entry points but are structurally designed to deliver stable performance," and added, "The key is to identify top-tier managers who can flexibly utilize both long and short positions to seize opportunities, even in difficult market conditions."

Even for pension funds, where 'stability' is the top priority alongside profitability, alternative investment portfolios are being reorganized in response to changing market conditions. Kim stated, "Given the current concentration in the stock market, we are considering increasing the allocation to hedge fund strategies that can properly diversify equity beta (sensitivity to the stock market)."

He also revealed that they are closely monitoring changes in the private credit market. Kim added, "Rather than a fundamental deterioration in private credit, we expect to see an increase in secondary deals (transactions between asset managers) in the private credit market driven by liquidity needs, and we are viewing this as a new investment opportunity."

This content was produced with the assistance of AI translation services.