South Korea to probe 10,000 private funds on losses

SEOUL: South Korean regulators, burned by scandals tied to complicated and risky financial products after relaxing rules, are planning to investigate all of the nation’s homegrown asset management companies handling private funds.

The Financial Services Commission (FSC) plans to probe the country’s 11,734 private and hedge funds over the next three years, according to Eun Sung-soo, chairman of the regulator.

The FSC is also preparing to raise the minimum investment amount for private funds to 300 million won (US$250,000) from 100 million won.

This comes on public backlash against misleading selling practices by brokers.

Eun attended a hearing at the Korean National Assembly on Monday, where lawmakers questioned the feasibility of carrying out the probe given the number of funds.

The chairman said the FSC will seek assistance from other agencies if necessary.

The Korean private fund industry had boomed to Us$346bil as of end-2019 from Us$119bil in 2013, thanks to eased regulation aimed at nurturing the domestic financial industry.

Asset mangers have come under fire of late for selling difficult-to-understand products to mom-and-pop investors or investing in riskier assets than advertised.

“I still think a thorough review is necessary for the asset management firms,” Eun told Bloomberg on the sidelines of a conference in Seoul.

“A key issue is whether the firms indeed invested money in assets as they promised.”

There have been numerous cases where Korean individual investors, faced with falling interest rates and a sluggish share market, have jumped into derivative-linked products that carry massive risks.

While it’s the investor’s responsibility to read up on the risks of an investment, the nation’s watchdogs have probed whether those products were sold without enough information provided to buyers or whether they had design flaws.

In its latest review of 1,786 local private funds, the FSC found instances of mismatches between liquidity of funds and that of securities they own as well as a lack of supervision over selling practices and risk management.

Lime Asset Management Co, a Us$4bil hedge fund manager that was popular with high-net-worth individuals in Korea, froze withdrawals last October from funds that owned convertible bonds and collateralised loan obligations.

Last week, Optimus Asset Management, a Us$430mil hedge fund manager specialising in alternative assets, was accused by a local broker of fraud and ordered to suspend all of its operations until Dec 29.

The FSC on Tuesday said it had decided to halt business, as most of the fund’s high-ranking executives and employees had left the company, and because the company was currently being investigated by the prosecutor’s office.

The FSC said it was only allowing essential work related to the protection of assets and investors.

Optimus in mid-june had prevented investors from withdrawing their investments, citing losses. The company said it had been deceived by service providers.