Gen2 Partners fund freeze headache for Korean brokerages, banks

South Korean financial institutions associated with Hong Kong-based hedge fund manager Gen2 Partners are in a predicament as they struggle to ensure the investment -- sold by them -- could be redeemed later on.

Brokerage firms here that sold Gen2 Partners’ funds, invested in the funds or issued derivative-linked securities based on the funds have moved to seek redress by lodging a complaint with the Hong Kong’s Securities and Futures Commission against Gen2 Partners over its alleged failure to notify the fund sellers and end-investors that its fund could be tied to another fund’s leveraging scheme. They have stopped short of receiving a response from Hong Kong’s SFC so far. The institutions also hired an undisclosed law firm to take potential legal actions.

Sellers of the fund include brokerage houses Shinhan Investment, Samsung Securities and Korea Investment & Securities, as well as commercial banks Woori and Hana.

As of end-June, Gen2 Partners sold its 1.08 trillion won ($911.54 million) worth of hedge fund to Korean investors, according to data from the Financial Supervisory Service presented to ruling Democratic Party of Korea Rep. Min Hyung-bae. Of the total, 1.01 trillion won worth fund was frozen.

Some of the brokerages, Samsung Securities and Kiwoom Securities, have used their own money -- worth a combined 364.7 billion won -- in their principal investment, the data also showed.

The sellers are considering asking the Financial Services Commission, Korea’s financial regulator, to collaborate with its Hong Kong counterpart to seek clarification of the matter. But the request is unlikely, unless the sellers manage to prove Gen2 Partners’ breach of law in its fund freeze, an FSC official said.

The row of fund freeze stemmed from the extraordinary structure of KS Asia Absolute Return Fund, part of which was up to 500 percent leveraged while targeting subordinated bonds issued by financial institutions in Asian countries including Korea.

Under the structure, KS Asia Absolute Return Fund used other normally operating funds as collateral. These include KS Korea Credit Fund, dedicated to hybrid securities and credit default swaps by Korean institutions; and CM Credit Fund, which invest in similar products issued by institutions from countries not limited to Korea.

“It is hard to understand the situation where Korean fund sellers and investors are not able to withdraw money from a normal fund on the deadline because of other funds’ leveraged position,” said a spokesperson of one of the sellers on condition of anonymity. “It’s up to Hong Kong authorities’ interpretation of the situation.”

Gen2 Partners is led by Kyle Shin, former head of Kingdon Capital Management Korea.

The news comes as a series of fund freeze by hedge fund managers have sparked concerns of fund sellers and end-investors, with some of them -- Lime Asset Management and Optimus Asset Management -- being accused of the alleged fraud.

FSS Gov. Yoon Suk-heun said in a meeting with high-ranking officials Tuesday that it is “regrettable to see that the financial industry is losing investor trust due to a series of private fund fiascoes,” urging fund sellers to be “more proactive in investor protection.”

By Son Ji-hyoung (consnow@heraldcorp.com)

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Correction to the report titled ‘Gen2 Partners fund freeze headache for Korean brokerages, banks’

In the report titled “Gen2 Partners fund freeze headache for Korean brokerages, banks” dated Aug. 11, 2020, we stated that South Korean financial institutions associated with Hong Kong-based hedge fund manager Gen2 Partners are in a predicament as they struggle to ensure the investment -- sold by them -- could be redeemed later, and investors who bought a normal fund, which is KS Korea Credit Fund or CM Credit Fund, are not able to withdraw money on the deadline because of leveraged position of other funds, i.e., KS Asia Absolute Return Fund managed by Gen2 Partners, and that Gen2 Partners used other normally operating funds as collateral.

However, we misidentified the reasons for suspension of Gen2 funds’ redemption. It is not true that KS Korea Credit Fund and CM Credit Fund could not redeem the investment sold by them because of the structure of KS Asia Absolute Return Fund. In fact, the funds managed by Gen2 Partners have been managed independently and each fund has never been used as collateral for each other. And Gen2 Partners informed us that they have decided to suspend the redemption by funds to avoid possible greater losses to the remaining investors after the redemption due to the plunging price of bonds in the worldwide after the COVID-19 event.

The foregoing report is corrected by this report.