1/2 of trillion won invested may be gone, Lime admits

Lime Asset Management estimates investors may lose up to half the money they committed to troubled funds run by the company.

More than 1 trillion won is at stake.

Some investors stand to lose their entire principal in cases where institutions have total return swap (TRS) agreements with Lime. Withdrawals are prioritized for those with these agreements, allowing the institutions to recover their investments before others.

According to the asset manager, its Pluto FI D-1 fund has suffered a 46 percent loss, while the Tethys 2 fund is down 17 percent. Pluto FI D-1 is four times the size of Tethys 2.

The hedge fund operator has been under fire for suspending withdrawals of investments worth 1.6 trillion won from troubled funds, including 937.3 billion won for Pluto FI D-1 fund and 242.4 billion won for Tethys 2.

A total of 173 sub-funds were run under the two funds, 29 of which have TRS agreements with three local securities firms ? Shinhan Investment, Korea Investment & Securities and KB Securities.

The company said among the sub-funds, three have 100 percent TRS leverage, which means all the investment could vanish for those investors lacking TRS agreements.

Lime Asset Management is the largest hedge fund company in Korea, managing 5 trillion won.

The company said in the press release that it is currently trying to recover as much value as possible and once again apologized to the investors and the local financial investment industry.

In light of the Lime controversy, the Financial Service Commission (FSC) on Friday released measures to improve the local private equity market.

The FSC said it would stop asset management companies from selling private equity funds as public offerings, which can attracted vulnerable retail investors.

The FSC said it will ban open-end funds in which non-current assets exceed 50 percent of the total. This is to prevent another Lime situation, in which withdrawals exceeded current assets and the fund faced a liquidity crunch.

Open-ended funds will also be required to be regularly stress tested for liquidity.

The FSC said it will increase its monitoring of funds that have a complicated investment structures. The management companies will have to regularly provide information on their investment structures, underlying assets, costs and risks.

The financial authority denied any problems were created by its relaxation of private equity fund regulations. It said it has investigated 1,786 funds with 22.7 trillion won managed by 52 companies between November and January.

But it said it has found no other major problems other than several management companies having weak investor protection.

“In making the status review, we haven’t found any major problems overall,” said Kim Jeong-kag, FSC capital markets director general. “While we can’t give specific details on management companies or the funds, several have been found to have weak structures in terms of protection.”

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]