"If foreign exchange rates rise to unusually high levels again, it is necessary to temporarily reduce the size of the foreign exchange exposure until the rates stabilise," the ministry said in a statement after a meeting of the panel that governs the fund's investment policies.
The ratio of FX hedging will be up to 10%, for a limited time period, depending on market circumstances, the ministry said without details.
The fund will also be allowed to hold foreign stocks in excess of the allowed ratio compared to the total if the ratio changed due mainly to wild fluctuations in prices.
The decision comes a month after the finance ministry requested the pension fund to increase the ratio of hedging foreign assets for the purpose of reducing the fund's impact on the onshore spot market from dollar-buying activities.
The fund has grown in size and its increasing purchases of dollars for investment abroad has been blamed for exacerbating the dollar/won's already rising trend in recent months.
The South Korean won struck its weakest level in 13 years in October, trading at 1,444.2 per dollar, a level last seen during the 2008-2009 global financial crisis and the Asian crisis in late 1990s.
(Reporting by Jihoon Lee; Writing by Choonsik Yoo; Editing by Tom Hogue & Simon Cameron-Moore)
