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Over half of Lime investors to see 50% drop in fund value


Victims of the redemption fiasco caused by Lime Asset Management hold a rally in front of the Financial Supervisory Service in Yeouido, Feb. 14. Yonhap
Victims of the redemption fiasco caused by Lime Asset Management hold a rally in front of the Financial Supervisory Service in Yeouido, Feb. 14. Yonhap

Over half of Lime investors to see 50% drop in fund value

By Lee Kyung-min

Managers of a fund with over 50 percent of its portfolio invested in illiquid assets will no longer be able to attract investors by promising "full redemption," following strengthened rules on a number of mismanaged financial products, the financial authorities said Friday.

The new rule bans such managers from setting up open-end funds, a type of an investment vehicle that allows frequent redemptions via continued flow of new contributions and withdrawals from a pool of investors.

Illiquid assets are not easily sold because of its expenses, lack of interested buyers, among other factors revolving around real estate measures, stocks with low trading volume, or collectibles.

The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) announced a set of measures amid investors' outcry against what they consider an "oversight failure" after a series of redemption scandals broke out involving Korea's large hedge funds and private equity funds, notably Lime Asset Management.

At the heart of the measure is to remove the "mismatch" between Lime's heavy investment in illiquid assets which by design made it hard for the hedge fund to promptly process investors' redemption requests.

This is why many investors and critics say Lime should have been banned from operating an open-end fund.

"We will seek to implement the minimum of regulations to prevent an incident whereby financial products are structured to undermine consumer protection," the FSC said.

The measure came on the heels of Lime's announcement that over half of its 1.67 trillion won ($1.41 billion) fund saw a nearly 50-percent drop in investment.

Some of its most popular funds worth 937.3 billion won in October 2019 will lose some 49 percent in net asset value in Feb. 18 while its second-most popular fund 17 percent, from 242.4 billion won in the same period.

Many others that invested in the remaining amount using total return swap (TRS) are certain to lose their entire investments.

This is because certain brokerages that provided investment money under TRS will be the first to claim their share over other investors.

Of the two TRS-applied funds, one in the amount of 244.5 billion won, is expected to lose up to 97 percent. The other worth 9.7 billion won will lose up to 78 percent in investment.

Used by hedge funds, TRS is an agreement on exchanging the return of reference assets. It is used to obtain leverage on reference assets seeking greater returns.

Stricter rules

Under the measure, a liquidity stress test will be a requirement for open-ended funds.

Sellers of the intricately designed and highly complicated funds will be required to fully inform customers about investment risks including the net asset value of underlying assets at the date of the redemption request filing.

They will be required to promptly inform investors about a delay in redemption and possible drop in the redemption price.

A report should be regularly filed to the authorities on liquidity risk vulnerability status and management plans.

Also to be banned is what the authorities call an "intra-fund investment" scheme, an investment method enabled by a firm receiving investment from or investing in the parent firm, or grandparent firm.

A fund can engage in a leveraged TRS, only with an independent prime brokerage service (PBS) firms, not with other funds from which it derives investment money.

A leverage rate under TRS will be limited to 400 percent of the fund value. More measures will be rolled out to enhance consumer protection possibly brought on by the unilateral termination of the TRS deal from PBS.

Final measures will be announced in March after collecting opinions from organizations of interest and experts.





Victims of the redemption fiasco caused by Lime Asset Management hold a rally in front of the Financial Supervisory Service in Yeouido, Feb. 14. Yonhap
Victims of the redemption fiasco caused by Lime Asset Management hold a rally in front of the Financial Supervisory Service in Yeouido, Feb. 14. Yonhap

Over half of Lime investors to see 50% drop in fund value

By Lee Kyung-min

Managers of a fund with over 50 percent of its portfolio invested in illiquid assets will no longer be able to attract investors by promising "full redemption," following strengthened rules on a number of mismanaged financial products, the financial authorities said Friday.

The new rule bans such managers from setting up open-end funds, a type of an investment vehicle that allows frequent redemptions via continued flow of new contributions and withdrawals from a pool of investors.

Illiquid assets are not easily sold because of its expenses, lack of interested buyers, among other factors revolving around real estate measures, stocks with low trading volume, or collectibles.

The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) announced a set of measures amid investors' outcry against what they consider an "oversight failure" after a series of redemption scandals broke out involving Korea's large hedge funds and private equity funds, notably Lime Asset Management.

At the heart of the measure is to remove the "mismatch" between Lime's heavy investment in illiquid assets which by design made it hard for the hedge fund to promptly process investors' redemption requests.

This is why many investors and critics say Lime should have been banned from operating an open-end fund.

"We will seek to implement the minimum of regulations to prevent an incident whereby financial products are structured to undermine consumer protection," the FSC said.

The measure came on the heels of Lime's announcement that over half of its 1.67 trillion won ($1.41 billion) fund saw a nearly 50-percent drop in investment.

Some of its most popular funds worth 937.3 billion won in October 2019 will lose some 49 percent in net asset value in Feb. 18 while its second-most popular fund 17 percent, from 242.4 billion won in the same period.

Many others that invested in the remaining amount using total return swap (TRS) are certain to lose their entire investments.

This is because certain brokerages that provided investment money under TRS will be the first to claim their share over other investors.

Of the two TRS-applied funds, one in the amount of 244.5 billion won, is expected to lose up to 97 percent. The other worth 9.7 billion won will lose up to 78 percent in investment.

Used by hedge funds, TRS is an agreement on exchanging the return of reference assets. It is used to obtain leverage on reference assets seeking greater returns.

Stricter rules

Under the measure, a liquidity stress test will be a requirement for open-ended funds.

Sellers of the intricately designed and highly complicated funds will be required to fully inform customers about investment risks including the net asset value of underlying assets at the date of the redemption request filing.

They will be required to promptly inform investors about a delay in redemption and possible drop in the redemption price.

A report should be regularly filed to the authorities on liquidity risk vulnerability status and management plans.

Also to be banned is what the authorities call an "intra-fund investment" scheme, an investment method enabled by a firm receiving investment from or investing in the parent firm, or grandparent firm.

A fund can engage in a leveraged TRS, only with an independent prime brokerage service (PBS) firms, not with other funds from which it derives investment money.

A leverage rate under TRS will be limited to 400 percent of the fund value. More measures will be rolled out to enhance consumer protection possibly brought on by the unilateral termination of the TRS deal from PBS.

Final measures will be announced in March after collecting opinions from organizations of interest and experts.




Lee Kyung-min lkm@koreatimes.co.kr


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