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KL Group - Equities

2005-03

Count of distinct funds: 6
Capital base: $150 million
Loss: $137 million

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stories: hedgefundreader.com, topix.net, typepad.com

This narrative contributed by Ann Logue.

In 1999, Won Sok Lee, Yung Bae Kim, and John Kim formed KL Group, which managed a series of hedge funds. The principals, who lived in Palm Beach, Florida, drove fancy cars and joined the right clubs to convince socially prominent investors of their track records. Between 1999 and 2005, the fund managers collected $81 million in assets from investors [ed. note: some reports give the total funds as twice this amount or more; and claims on KL exceeded $137 million]. They lost all but $11 million of that, but that didn’t stop them from reporting returns of over 125% a year. In early 2005, investors trying to withdraw funds found out that all of their money was gone and that two of the fund’s managers, Won Sok Lee and Yung Bae Kim, had fled the country. The third manager, John Kim, cooperated with investigators.

Three things might have tipped off potential investors. The first is that KL Group’s principals refused to discuss the strategy, holdings, or risk levels, arguing that they were entirely proprietary. Fund investors are entitled to some information about what is going on and what kind of risk the fund has. Second, a 125% return is not sustainable over the long run; it’s possible to make that much money, but only with large risks. That fabulous claim alone should have raised some questions, especially because it was made back to 1997 for a fund that did not begin operations until 1999. John Kim and Won Sok Lee were day trading technology stocks back then, so they claimed that performance for their funds, or at least they claimed the performance that they would have liked to have had. Performance had never been audited.

But there was another sign of bad practice. The fund’s trades were made through an in-house brokerage firm, Shoreland Trading. That made it easier for Lee and the Kims to hide their scheme; most hedge funds work with brand-name brokerage firms.

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Important: This fund is on our list of hedge funds that have "imploded" (see also ailing lenders). However, please note that "imploded" is a somewhat subjective. The "imploded" list contains hedge funds (or other unregulated and autonomous speculative investment funds) which have gone through some sort of permanent adverse change. This is a somewhat subjective call, and does not necessarily mean total shutdown or bankruptcy. It can also mean steep and rapid mark-downs in net asset value; or abnormal "bail-out" by corporate parents or peers in order to avoid write-downs and provide liquidity. The funds are of any type and sector.