Back in the summer of 2008, Bill Hwang was riding high, enjoying a reputation as one of the hedge fund industry’s brightest young stars. Hwang — a South Korean immigrant who arrived in the U.S. in 1982 as an 18 year-old who understood but could barely speak English — was the founder of the New York City-based Tiger Asia long-short equity hedge-fund firm.
Through 2007, Tiger Asia racked up a compounded annualized return of about 40 percent. At the end of 2007 Hwang had about $8 billion under management. He and Chase Coleman, the founder of the Tiger Global Management long-short equity hedge fund firm, were held up as shining examples of the huge success of Julian Robertson’s seeding strategy created at the beginning of the decade. That’s when Robertson, the founder of the legendary hedge fund firm Tiger Management, began doling out start-up capital to some of his more promising employees to launch their own hedge funds.
As the shaky financial markets started to crumble in 2008 amid concerns over subprime mortgages, Tiger Asia was in the black as late as August of that year. But Hwang was bullish for the rest of the year, and it cost him: He finished the year down 23 percent.
As Hwang’s disastrous 2008 wound down, the U.S. government says he and his firm engaged in two illegal acts that resulted in $16.7 million in bogus profits. The Securities and Exchange Commission brought civil charges against Hwang, his firms Tiger Asia Management and Tiger Asia Partners and head trader Raymond Y.H. Park. The U.S. Justice Department criminally charged Tiger Asia Management in the same case but stressed it will not charge Hwang or any other employees.
On Thursday, in a separate case, Japan’s securities regulator reportedly fined Tiger Asia Partners $816,500 for allegedly manipulating the trading of shares of Yahoo Japan Corp., the country’s highest penalty in a market manipulation case. It did not bring any insider trading charges, however. Meanwhile, since 2009 Tiger Asia has been battling with Hong Kong securities regulators, which have been trying to freeze Tiger Asia Management’s assets stemming from allegations the hedge fund violated local insider-dealing and market-manipulation rules.
The SEC alleges that from December 2008 to January 2009 Hwang and his firms engaged in insider trading of three Chinese bank stocks. From November 2008 to February 2009 they were also accused of engaging in a scheme, involving Chinese bank stocks, whose ultimate goal was to collect higher management fees from investors.
Is it ironic that Hwang and Tiger Asia committed these illegal acts as the hedge fund was about to post its first loss — and a big one no less? Would he have done this in December 2008 if he were up 20 percent at the time? Or were the illegal trades inspired by or connected to the fact that Tiger Asia was in the red and desperately trying to dig out of it before year-end? We don’t know and the government doesn’t speculate about this possibility.
However, it would not be the first time that desperate times spawned desperate measures. Nor would it be the first time an investor — or a gambler at a casino — engaged in risky behavior to try to win back his losses. People in this position often think the means would justify the results if they could only get back to even.
This is frequently how pyramid schemes (which, to be clear, this was not) get hatched. In many cases, the individual starts off managing money legitimately, but when trades go south, he engages in temporary “borrowing” of assets, vowing he will only do so until he breaks even.
In fact, earlier this year the SEC brought a case against Angelo A. Alleca and Summit Wealth Management, an Atlanta fund manager who told investors he would be investing their money in a fund of funds. Instead he traded individual stocks that resulted in losses. The regulator alleged that instead of confessing to his clients what he had done, he simply created new funds with the hope of making back the losses to repay the original investors. However, these new funds suffered losses as well.
Perhaps Hwang’s fall from grace is a cautionary tale. When a fund manager — seemingly out of nowhere — enjoys several years of success, the pressure to sustain this success is enormous, not only to preserve his own reputation, but in the case of hedge funds, to preserve their enormous financial gains.
After all, Hwang’s success was a classic rages-to-riches immigrant story. Six years after landing in the U.S., Hwang, who preferred to go by his adopted American name rather than his Korean name, Sung-Kook, graduated from the University of California at Los Angeles and then received his MBA from Carnegie Mellon University.
In 1992, Hwang’s success was set in motion when South Korea opened its market to foreign investors. While a broker with Hyundai Securities, he met an analyst with Tiger Management and eventually struck up a relationship with Tiger founder Robertson, who eventually hired him to help navigate the South Korean market, which Robertson thought was undervalued.
After Tiger was shuttered, in 2001 Hwang became one of the first incubator funds to be seeded by Robertson. Now he is one of the biggest embarrassments of the huge — and mostly successful — Tiger Diaspora.
