Regulator Seeks Probe Over Korean Hedge Fund’s U.S. Investment

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(Bloomberg) -- Lime Asset Management Co., the firm at the center of a scandal that sparked unprecedented withdrawals from South Korean hedge funds, now faces an investigation into its investment in a troubled U.S. fund.

A senior official at the Financial Supervisory Service said South Korea’s top financial watchdog will ask prosecutors to probe Lime’s investment in funds run by International Investment Group LLC. The U.S. Securities and Exchange Commission last month revoked IIG’s registration, accusing the New York-based investment adviser of hiding losses and selling at least $60 million in fake loan assets to clients.

Lime Asset, Korea’s largest hedge fund with about $3.7 billion under management, halted redemptions from some of its funds in October as it couldn’t return cash as fast as clients wanted. The withdrawals came amid a probe into the company’s investments.

The Seoul Southern District Court issued an arrest warrant for Lee Jong-pil, Lime’s former chief investment officer, on Nov. 15 on concerns over flight risk and possible destruction of evidence, but he didn’t show up for his hearing, the court said in a text message. The FSS official said the regulator has temporarily suspended its probe of Lee, who has been fired by Lime. Calls to Lime Chief Executive Officer Won Jong-Jun by Bloomberg went unanswered.

The funds frozen by Lime were invested in illiquid assets such as private loans, convertible bonds and collateralized loan obligations repackaging trade-finance assets. The FSS official said some Lime funds were invested in assets managed by IIG. The U.S. firm specializes in trade finance lending to small- and medium-sized companies in emerging markets, according to the SEC complaint. The Korean regulator looks to determine whether Lime was aware that IIG was in trouble and neglected to notify its clients of the related risk.

Total assets under management of local hedge funds in Korea rebounded to 34.9 trillion won ($30 billion) as of end-November, according to data from NH Investment & Securities. That marked a reversal of the record 700 billion won withdrawal over two months in the wake of Lime’s difficulties.

Still, the industry is likely to continue struggling amid strengthened regulations on local brokerage sales of hedge funds to retail investors and a hike in minimum investments by hedge funds in the aftermath of the incident, NH said.

©2019 Bloomberg L.P.

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