Imagine someone cheated you out of a trillion won. That’s what LIME Asset Management (hereafter LIME) did to its investors. LIME first came to light in July 2019 upon an investigation by the prosecution for unfair transactions. Since then, the scope of investigation into the fiasco unofficially deemed the “LIME situation” has widened to include other allegations such as stock price manipulation and even misuse of connections with the Cheong Wa Dae and the Financial Supervisory Service (FSS). A quick glance at Korea’s financial history would show that this is not the first time hedge funds have caused issues.

Hedge funds — small scale funds with few regulations on where and how to invest — can be very tempting to both investors and asset management firms; high returns, although preceded by high risk, is very tempting. For this reason, LIME wholeheartedly jumped on the hedge fund bandwagon and grew to handle a whopping five trillion won by the first half of 2019.

Never Meant to Last

Although it may seem precarious to those who do not enthusiastically participate in the financial sphere, the structure of LIME’s fund management itself was not technically problematic. The decline of LIME is often attributed to contributing investments from numerous “child” funds into just four “mother” funds and taking advantage of the Total Return Swap (TRS), which uses investors’ money as collateral to take out loans from securities firms. The success of the child-mother fund relationship relies heavily on the asset management’s few investment choices. Additionally, TRS allows the management to maneuver more money than was invested, making it so that in the case of severe loss, investors may not collect even their original investment amount.

It cannot be denied that these two tactics have dangerous components because of their high-risk property. However, regulations exist so that only competent candidates can invest; hedge funds can only be invested in by professionals at institutions or “qualified individuals” whose income, estate, or investment amount exceeds the minimum. Therefore, although hedge funds and its management tactics may have issues, it is definitely not illegal. What was critical to LIME’s failure was not from its management structure and protocol, but the way it was actually managed.

LIME’s funds turned out to be associated with several illegal acts. Out of LIME’s four main funds, the Trade Finance Fund consisted of 600 billion won, of which 240 billion was invested money and the rest TRS-loaned. 40 percent of it was invested into a hedge fund of the International Investment Group (IIG), an American firm. When IIG was accused of having run a Ponzi scheme, the United States (U.S.)’s Securities and Exchange Commission (SEC) froze IIG’s assets in 2019, freezing a bulk of LIME investors’ money as well. It is currently suspected that around that time, LIME began to internally use investors’ money to buy off others’ funds to generate returns, running a Ponzi-like operation themselves.

Signs of LIME’s failure that eventually set off an alarm with investors were redemption restrictions. Twice in October 2019, LIME was forced to set restrictions on redemptions to funds worth 850 billion won, leading investors to question the safety of their investments. From then on, the LIME situation snowballed. Even more financial frauds, such as giving incorrect information about return rates to investors and changing a fund’s investment target without notice, were revealed.

Finally, when a recording was uncovered of an insider stating that a former Cheong Wa Dae executive official and current FSS employee was working with LIME to slow down investigations, the LIME situation garnered even more attention because of the possibility that its issues stem not only in the economic sphere, but also the political.

Dealing With the Aftermath

Unlike the high hopes investors had when putting their money towards LIME, the outlook for investors’ reimbursement possibilities is dismal. LIME has announced that it will start redeeming in May for Pluto FI D-1 and Thetis 2, two of LIME’s four mother funds. The redemption rate for the former is 33 percent and the latter 45.4 percent. 68.4 billion won has been cut from the formerly predicted redemption amount due to TRS, which compels LIME to pay back securities firms prior to investors. The Trade Finance Fund is predicted to have a loss rate of 100 percent, although inspection results into this fund are yet to be released.

Individuals and institutions are proceeding with legal responses to the LIME situation. Many victims who have been deceived by LIME are filing lawsuits against institutions that sold the LIME funds, such as Shinhan Investment Corporation and Woori Bank, on the grounds of misselling. However, because misselling — misinforming or omitting information during financial consumers’ purchase — is difficult and tedious to prove, it is more likely that LIME, rather than the vendors, will be penalized first by the prosecution and FSS according to the results of investigations.

When thoroughly examined, the crux of the LIME situation is that many investors without the financial capacity to deal with the aftermath of LIME’s tampering of assets have been impacted. Professor Binh Ki Beom (Myongji University, Department of Economics) commented, “A desirable direction in which hedge fund management regulations should change is actually to ultimately eliminate it. However, the bar needs to be raised regarding what it takes to be a qualified individual or be classified and treated as a hedge fund. This in turn will allow a free flow of hedge funds and at the same time, protect financial consumers.”

LIME’s deeds were undeniably shocking; nonetheless, the fact that it feels like déjà vu cannot be denied. All in all, it seems hedge fund regulations are certainly in need of adjustment for it to function in a healthy and beneficial way in which it was intended. As this unwelcome occurrence implicitly but clearly instructs, the results of the investigations this time around will need to be scrutinized so that related financial laws can be reformed.