A Hedge Fund Giant in Samsung Empire Finds Hurdles Close to Home

  • Samsung Electronics’ success can hurt hedge fund returns
  • Samsung hedge fund says group name is also double-edged sword

For Samsung’s $1 billion hedge fund, the looming presence of Samsung Electronics Co. -- and even the Korean conglomerate’s name -- can be part of the challenge.

Samsung Hedge Asset Management Co. rose 3.4 percent last year for its worst annual return since its inception in 2011, in part because Samsung Electronics’ shares became so popular that investors pulled cash from the smaller stocks that the money manager often favors. The hedge fund is predicting that trend will reverse this year and a rally at Korea’s largest companies will fade, Samsung Hedge Chief Executive Officer Yoonho Heo says.

Yoonho Heo

Photographer: Jean Chung/Bloomberg

“Samsung Electronics attracted most of the money along with a few other large-caps,” Heo said in an interview at the Samsung complex in the upscale Gangnam district of Seoul. “We have so many great stocks in Korea but the supply” of funds is biased toward Samsung Electronics, he said.

For outsiders, it’s a surprising conundrum. Samsung Hedge has been able to parlay the wide recognition that its family of companies commands to become one of the dominant players in South Korea’s nascent hedge fund industry. And yet, for Samsung Hedge to perform well, it can often be better if the group’s crown jewel, the electronics giant, falters. There’s also the high level of scrutiny that comes with being associated with the world’s largest smartphone maker, whose heir apparent was arrested last week in a bribery and perjury scandal.

Skewed Market

Samsung Hedge’s predicament highlights the perils of investing in markets that are disproportionately skewed toward a handful of large stocks. As assets managed by South Korea’s hedge funds doubled last year, it’s also a reminder for global investors turning to smaller markets in search of higher returns that such investments come with their own risks.

Samsung Electronics “is such a big weighting in the index,” says Andrew Tsai, chief investment officer of Chalkstream Capital Group, a U.S. investment firm that puts money in South Korean equities. “If you take out some of the bigger companies, the general markets were down last year.”

Samsung Electronics’ market value of more than $236 billion accounts for about 18 percent of the country’s stock market, which contains more than 2,500 listed companies. Samsung Hedge itself oversees almost 15 percent of the $7 billion in assets held by South Korea’s hedge funds, according to Gilbert Choi, an analyst at NH Investment & Securities Co. The number of local hedge funds more than quadrupled to 250 last year, NH Investment says.

Samsung Hedge didn’t completely miss out on the increase in large stocks. During difficult times last year, Heo says the firm’s mathematical models guided the fund’s shift away from active bets on smaller shares into cash, bonds and bigger companies including Samsung Electronics. That helped offset declines at smaller companies, as the phone and chip maker surged 43 percent in 2016.

Samsung Hedge is a unit of Samsung Asset Management Co., which is 99 percent owned by Samsung Life Insurance Co., which is controlled by Samsung Electronics Chairman Lee Kun-hee, Samsung C&T Corp. and Samsung Life itself.

The hedge-fund firm, which runs long-short and other strategies, has seen its main fund advance 40 percent cumulatively since its inception in 2011. The Samsung H-Club Equity Hedge Privately-Placed Investment Trust, which has a heavy focus on quantitative analysis, posted a 3.4 percent return last year, closely tracking the 3.3 percent increase in the benchmark Kospi index. Over the previous four years, the fund’s annual gain never fell below 8 percent. Its highest return was 11 percent in 2013.

“Our funds were hurt relatively less,” Heo said of 2016. “It was the year of the collapse of small and mid-cap stocks. If we hadn’t reduced our exposure to them, we would have really struggled.”

Samsung Electronics, meanwhile, closed last year just short of a record high at the time, even as its billionaire Vice Chairman Jay Y. Lee lay at the heart of an investigation into influence-peddling that’s already led to the impeachment South Korean President Park Geun-hye.

Heo says the surge in bigger companies such as Samsung Electronics may not be sustainable. There are already signs the sheen is coming off. So far this month, Samsung Electronics had fallen 3.1 percent through the end of last week, while the Kospi gained 1.3 percent. Samsung dropped 0.4 percent in Monday trading, as did the Kospi.

“I’ve never seen this kind of rally led by a very few large-cap stocks lasting for more than 12 months,” Heo said.

Beyond Samsung Electronics, even having the Samsung name today is very much a double-edged sword, Heo says. While the brand is trusted by investors and useful for raising capital, the group’s high profile in South Korea means the hedge fund can’t afford to make mistakes. Heo gives the example of short selling, a practice that’s viewed with suspicion in the country, where trading in smaller stocks is dominated by retail investors.

If Samsung Hedge shorts a company, it has to be absolutely sure of its thesis, because of the backlash it will get if wrong, Heo said.

"We are at the center of public attention," he said. "If our funds underperform a bit, we get more criticism from the public and the media. They ask what’s happening to Samsung’s hedge fund.”

    Before it's here, it's on the Bloomberg Terminal.