Private funds are targeted by regulator after losses

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Private funds are targeted by regulator after losses

Regulators are examining the operations of privately-sold funds following heavy investment losses in some products and major liquidity problems at one asset manager, local press reported Sunday citing unnamed financial officials.

The Financial Supervisory Service (FSS) will begin its investigation this week.

This year, funds sold by a number of financial groups experienced dramatic losses after investing in derivative securities, which are highly volatile. The situation was made more critical when Lime Asset Management, Korea’s largest hedge fund, was unable to make timely payments to investors.

Assets totaling around 1 trillion won ($848 million) are in danger of being frozen.

The FSS will undertake an examination of all privately-sold equity products in Korea, looking into their portfolios, operations and leverage.

Liquidity will also be a key focus. The regulator wants to determine whether the asset management companies are able meet redemptions by investors who want to cash out. Lime failed in this respect, citing the challenging Kosdaq market.

The authorities will investigate whether asset management firms are prepared with sufficient capital reserves, and they’ll also keep a close watch on the overall gearing of portfolios.

Unlike public offerings, private funds that operate with capital from a small, select group of investors are not subject to strict obligations on disclosure and transparency.

The main target of the FSS is security-linked and derivative products. As of September, a total of 11,336 privately-sold funds were offered in the country, among which 3,691 were security-linked and 1,912 were derivative-linked. As of June, 186 asset management companies specialized in offering private equity fund products.

The FSS’s decision to conduct the large-scale investigation follows substantial losses related to derivative-linked securities (DLS) and derivative-linked funds (DLF). Some of the poor performing DLS and DLF investments were sold by Woori and KEB Bank.

The fact that a large number of elderly people subscribed to the relatively complex investment products raises doubts over whether financial institutions fully informed their clients of the risk involved. It is now being questioned whether banks should be allowed to sell high-risk investment products at all.

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