Hedge Funds Look to North Korean Bonds

Hedge fund managers are always on the lookout for investment opportunities, and now is no different. “Saturday’s death of North Korean leader Kim Jong Il has given a lift to that country’s only openly traded securities, a batch of bonds that haven’t received a payment in almost three decades,” writes the Wall Street Journal. “The premise that has attracted hedge funds and pension funds is that North Korea can’t exist in isolation forever, and, like other former communist countries, will need to tap the international markets for funds.”

Andrew Chappell, head of European, African and Middle Eastern fixed-income trading and sales at Exotix, says that inquiries into North Korean bonds have increased in recent days. “Investors are looking at this as an unlimited option trade with enormous potential gains,” said Chappell. According to his calculations, “investors’ claims extend to the principal and interest accrued since 1984, when the original loans defaulted. That amounts to anywhere between 300% to 600% of the principal in unpaid interest.” Right now, hedge fund investment in North Korean bonds is very hush hush but seems to be significant. According to Chappell, “holdings are now concentrated among a dozen or so blue-chip pension-fund managers and hedge funds,” but he isn’t naming names.

In other words, “Those who have bought the bonds are making nothing less than a bet that the transfer of power to Mr. Kim’s son Kim Jong Eun will usher in a moment akin to that of the Berlin Wall’s collapse for the tightly controlled communist country.” The death of Kim Jong Il “has opened a rare opportunity that bets on these bonds could pay off.. although there is little indication of what the structure of the government will look like under Kim Jong Eun or the direction it will take.” North Korea is in poor shape financially. There are unpaid debts to satisfy and a gross national product that is a mere fraction of neighboring South Korea’s ($1.12 trillion versus $29 billion), to dsay nothing of the economic situation many North Koreans find themselves, but the “U.S. and other Western powers [could] use this opportunity to bring North Korea into the international fold,” chaning everything.