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Scandal at Largest Korea Hedge Fund Triggers Record Outflows

Scandal at Largest Korea Hedge Fund Triggers Worst Outflows Ever

(Bloomberg) -- South Korea’s $29 billion hedge-fund industry just saw its worst withdrawals ever, after its largest fund froze redemptions from investments on illiquid assets.

Outflows from local hedge funds reached a record 700 billion won ($598 million) in the past two months, with the total assets under management falling to 34.2 trillion won, according to Gilbert Choi, an analyst at NH Investment & Securities. It is the the first time since November 2017 that they suffer two straight months of outflows. The industry had rapidly grown in recent years amid the country’s record-low interest rates.

Scandal at Largest Korea Hedge Fund Triggers Record Outflows

Investor sentiment is souring on the homegrown hedge funds after its largest, Lime Asset Management Co. with about $3.5 billion, halted redemptions from some of its funds as it couldn’t return cash as fast as clients wanted last month. The frozen funds were invested in illiquid assets such as private loans, convertible bonds and collateralized loan obligations repackaging trade-finance assets. Regulators estimate about 3,000 retail investors in the country will be affected given the size of the suspension.

“October was a bleeding month,” Choi wrote in a note on Thursday. “Mezzanine funds faced a crisis due to the redemption scandal at Lime Asset. The hedge-fund industry, which had rapidly risen recently, is struggling.”

The Financial Services Commission, the nation’s top financial policy-making body, said Thursday it will strengthen hedge-fund industry regulations to protect retail investors, including raising the minimum investment to 300 million won from the current 100 million won and prohibiting local banks from selling hard-to-understand private funds to mom-and-pop investors. Back in 2015, the regulator relaxed the rules for private funds to nurture the nation’s small- and medium-sized companies and startups.

Korean regulators have investigated fewer than 10 hedge-fund firms with portfolios exposed to convertibles and haven’t found a problem similar to Lime’s, said a senior official at the Financial Supervisory Service, the top financial watchdog.

Scandal at Largest Korea Hedge Fund Triggers Record Outflows

There are currently a total of 2,998 hedge funds in South Korea, down from 3,002 at the end of October, according to NH. About 10% of them focus on so-called mezzanine assets such as convertibles, but there could be more funds exposed to hybrid securities like those that have multiple strategies, Choi said. Mezzanine funds have returned 4.3% this year, compared with 3.6% for the wider industry and 4% for the benchmark Kospi index, according to NH.

“Some firms couldn’t overcome the crisis in the industry and are closing their funds,” said Choi. “Maybe it is a growing pain for the industry.”

--With assistance from Kyungji Cho.

To contact the reporter on this story: Heejin Kim in Seoul at hkim579@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Cecile Vannucci

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