Korean Regulators Push Banks to Take on Losses From Hedge Fund

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South Korean regulators ordered some local banks and brokerages to take on 100% of the losses on a hedge fund’s investments in illiquid assets as officials crack down on the selling of complex financial products to retail investors.

The Financial Supervisory Service, the nation’s top financial watchdog, will push to have the firms cancel contracts on some funds run by Lime Asset Management Co., a hedge fund in Seoul that once oversaw $4 billion in assets, and return the money to investors, according to a statement on Wednesday.

The funds, worth 161 billion won ($134 million), invested inCLOs that repackaged trade finance assets, the FSS said. They were sold to 558 retail investors without providing appropriate information on performance or risks, and failed to evaluate the investment style of clients, the watchdog said.

Korea’s hedge fund industry faced a net outflow this year, shrinking to $24.8 billion by the end May, after Lime, the largest hedge fund in the country, halted withdrawals from some of its funds that held the convertible bonds of small Korean companies or risky loans.

The industry for private funds, including hedge funds, had grown to $346 billion amid the government’s push to nurture ventures. The growth spurred concerns over improper marketing practices and the design of certain funds. About 1.6 trillion won of Lime’s funds have been halted, according to FSS.

Read more:Korea to Probe 10,000 Private Funds After Investors Got Burnt

It is the first time that Korean regulators have asked banks to give clients back the full amount of money invested in financial products. Last year, regulators sought for firms to return 80% of the money invested instructured notes linked to German bond yields to retail investors. In 2008, authorities pushed for 41% of the losses oncurrency-related contracts to be given back to exporters.

“The scandal at Lime generated a massive number of victims, combined with mis-selling, excessive leverage provided by brokers, and illegal management of assets,” the FSS said in a statement. “We found we can’t seek responsibility from investors in this kind of situation.”

— With assistance by Kyungji Cho

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