The opening of the Korean fund market was instigated as part of the opening of the Korean capital market. Foreign investors can gain exposure to the Korean market through funds established exclusively for non-residents, which are called onshore funds, or the normal domestic funds for Korean residents.

   Onshore funds were a preparatory step before the introduction of direct investment into Korean domestic funds, and the first securities investment trust for foreign investors was established in 1981. From that time, the sales amount of investment trusts for foreign investors (onshore funds) gradually increased as the market was slowly opened in line with the country's economic development. By the end of August 1997, the size of onshore funds for foreign investors had reached a high of US$4.8 billion, but in the second half of 1997 foreign investors began to withdraw funds because of the economic crisis triggered by the excessive amount of foreign debt. Also, as the foreign investment ceilings in the Korean stock and bond markets were abolished, the attractions of onshore funds began to fade. As a result the size of investment trusts exclusively for foreign investors had declined to US$3 billion as of the end of 2004.

   In case of domestic equity funds, in 1997 foreign investors were allowed for the first time to invest in equity-type trust funds set up for domestic investors (with over 80% of assets invested in stocks) in order to accelerate the opening of the securities investment trust market. Further obstacles to investment in the Korean capital markets by foreign investors were removed in 1998, and now there is little discrimination between foreign and domestic investors.

   The turnaround of the local stock market seemed to attract foreign capital into these onshore funds for foreign investors (OFFs) with assets growing by 15.3% (US$277 million) in the year from June 2003 to US$2,093 million. The assets of OFFs have been on an upward trend since 2001 with annual growth of 196.4% in 2002 and 37.4% in 2003. This continued growth in the assets of OFFs indicates that the Korean market has been attractive to foreign investors.

   For overseas investment, there are two channels available to Korean investors: overseas investment trust funds and foreign-domiciled funds, so-called offshore funds. Overseas investment trust funds were first approved in 1993 as the first stage in the process of allowing Korean residents to make indirect investments overseas. From that time, the total amount of such funds increased sharply to reach US$1.6 billion as of the end of July 1997 as the Korean stock market was bearish and interest rates in Korea were gradually falling. In the early stage, most equity funds invested in equities of developing countries, especially those in Southeast Asia . From 1996, bond funds that invested in bonds of developing countries in Southeast Asia and South America and in Russia became popular because of the relatively high interest rates in those countries.

   From late 1997, interest rates in Korea began to rise sharply because of a credit crunch in the money market as the economy moved into a crisis. Moreover, the funds invested in Russian government bonds suffered severe losses of principal owing to Russia 's declaration of a debt moratorium in 1998. Investors began to increase redemptions of overseas investment trust funds and the outstanding amount declined to only US$518.8 million as of the end of July 1999. From later in 1999, however, the funds began to regain their popularity along with the bullish US stock market. Although the US stock market turned bearish from 2000, Korean investors had high expectations that the US market would recover soon. Consequently, total assets rose to reach US$2,403 million as of the end of 2002.

   As overseas investment funds have gained favorable attention from investors since 2000, these funds, established by domestic fund management companies to invest overseas, have begun to regain their popularity. The net assets of the funds amounted to US$3,207 million as of the end of June 2004, an increase of 49.4% over the end of June 2003.

   Sales of foreign-domiciled funds were permitted in Korea in 1997 and the total sales balance rose to US$108 million in October 1997, just before the economic crisis. After the crisis, the amount fell sharply to stand at US$17 million as of the end of May 1999. From 2000, distributors have been marketing these funds actively, and the assets of offshore funds have increased dramatically, especially in 2003 and 2004, as investors are seeking overseas opportunities because of lower domestic interest rates and the fluctuations in the domestic stock market. The total assets of these funds increased by 29.7% to US$2,326 million in the year to June 2004.

   The opening of the local investment fund industry to foreign companies has been pursued fairly gradually, but the pace has accelerated since the need for foreign currency became more urgent under the foreign debt crisis and the agreement on a rescue package from the International Monetary Fund.

   Foreign fund management companies may enter the local fund management industry by establishing a branch, subsidiary, or joint venture, or by taking over existing holdings in an asset manager. Also their local branch may act as the manager of investment funds.

   In order to set up a local branch, the applicant should have sufficient experience in the fund management industry overseas and also meet international criteria for assets and operations. The foreign asset manager should satisfy the following four qualifications: 1) it has been in the asset management business; 2) its assets under management (AUM) shall exceed five trillion won; 3) its credit rating shall be over investment grade, 4) there has been no criminal or administrative punishment from its domiciled country.

   Once a foreign domiciled asset manager satisfies the qualifications, the requirements for foreign fund management companies are the same as those for domestic companies. In case of setting up an independent firm, it should have a capital stock of more than ten billion won and seven registered fund managers. The working capital of any local branch should be at least three billion won and it must employ at least five registered fund management staff. The company, firm, or branch should be approved by the FSC.