With stock markets at home and abroad swinging sharply in recent weeks, so-called profit-loss tiered funds — which cushion investment losses up to a set level — are emerging as an investment alternative. The funds split investors into senior tranches, held by individuals, and junior tranches, held by financial firms or the government. When losses occur, junior investors absorb them first up to a fixed ratio, reducing the risk of principal loss for individuals. When the funds gain, the senior tranche is paid first, offering returns above prevailing market interest rates.
Once offered mainly in the private fund market for high-net-worth clients, tiered funds are increasingly appearing in the public retail market, according to financial investment industry officials on the 16th. The products are difficult to design and manage, because financial firms must commit their own capital to share the downside risk and because the vehicles are structured as funds of funds, bundling multiple underlying private funds.
Korea Investment & Securities has rolled out 19 public series in total, including the Korea Investment Korea-U.S. Earnings Focus fund, which raised 161.4 billion won this month, pushing cumulative assets past 2.1 trillion won. Every follow-up product launched since the second half of last year has drawn more than 100 billion won, and 16 of the 19 have been redeemed early or are close to early redemption.
Under the series, managed by firms including Korea Investment Management, junior investors typically absorb losses of up to 15% based on the underlying funds. The funds are redeemed early once they reach their 15% target return. Analysts say the "shield effect" stands out in a correction such as the current one. The Korea Investment Korea Core Growth Focus fund, launched in April, is posting a return in the negative 10% range amid weakness in the domestic stock market, but individual investors' actual losses are being contained because junior investors absorb losses down to minus 15%.
Investors should note, however, that tiered funds are not principal-protected products. If markets plunge beyond the junior cushion — roughly 15% to 23% — senior investors can also lose money. Unlike private products that aim for early redemption within about one to two years, policy-backed funds are closed-end vehicles with five-year maturities, so investors need to choose selectively based on the nature of their money.