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Best practice guidelines for Korean hedge funds

Ji Yeoun Kim

Following the amendment to the Enforcement Decree of the Financial Investment Services and Capital Markets Act in September 2011 to introduce Korean hedge funds, 12 hedge funds operated by nine different asset management companies have been registered. To assist in the successful operations of hedge funds in Korea, the Financial Supervisory Service and the Korea Financial Investment Association have issued best practice guidelines for Korean hedge funds and prime brokers which came into effect from December 12 2011.

The guidelines are designed to be supplementary to relevant regulations and include business procedures and standards related to hedge funds and prime brokerages. Hedge funds, management companies, prime brokers, investment traders, trustees, administrators, and so on, who are involved in the operation of hedge funds are subject to the guidelines.

The following guidance is provided for hedge funds:

  • standardised collective investment agreement, articles of incorporation and prime brokerage services agreement;
  • required contents for internal control system including legal compliance, prevention of conflicts of interests, prevention of money laundering, etc;
  • how to establish a risk-control committee and/or organization, and the authorities given to them;
  • establishment of an information provision scheme and requirements for investment offering letters including the nature and purpose of funds, information regarding persons in charge of operation, fees, taxation, and so on; and
  • risk-control guidelines for indirect hedge funds (diversified investments in more than five hedge funds).

For prime brokers, the guidelines prohibit unsound business conducts; and outline the scope of prime brokerage services (a prime broker's credit lending to funds or investors must not exceed two-times its equity capital).

This year will be marked as the beginning of Korean hedge funds and the guidelines are likely to be further updated following future experience in the market place.

Ji Yeoun Kim

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