GF Securities Saddled With Offshore Hedge Fund Loss

Shenzhen-listed GF Securities Co. became the second Chinese brokerage house to be saddled with massive losses on foreign investments, reflecting growing exposure to risk after years of aggressive offshore expansion by Chinese financial institutions.

GF Securities said Wednesday that its subsidiary hedge fund, GTEC Pandion Multi-Strategy Fund SP, had a loss of $139 million in 2018, mainly on foreign exchange trades, leaving the fund with negative capital of $44 million.

Securities regulators in the company’s home base of Guangdong blasted GF Securities for failing to properly manage the unit’s risk. The ripple effects are putting pressure on Citigroup Inc. as the U.S. investment bank faces as much as $180 million of losses on a loan to the fund, Bloomberg reported.

The unit’s red ink lowered GF Securities’ 2018 net profit by 919 million yuan ($137 million) to 3.9 billion yuan, a 53% drop from the previous year, according to GF Securities’ annual financial report released Wednesday.

Earlier, Chinese brokerage Everbright Securities Co. reported a potential loss on its investment in the defunct London-based sports rights company MP & Silva. Everbright last week forecast 2018 results with provisions for 120 million yuan of asset impairment, about 10% of the brokerage’s 2017 net profit.

China Merchants Bank, one of the country’s largest commercial banks and part of a Chinese MP & Silva investment consortium led by Everbright Securities, said Tuesday that its investment in the 2016 deal totaled 2.8 billion yuan from funds raised by selling wealth management products.

The GF Securities loss prompted the Guangdong securities regulator to issue an administrative order requiring the brokerage house to examine its internal operation and risk control mechanism and rectify flaws. The securities regulator said GF Securities failed to properly manage risk and business prudence in its overseas subsidiaries.

The Pandion fund was registered in the Cayman Islands in 2016, specializing in equity derivative trading. Its investment targets later expanded into interest-rate products, foreign exchange derivatives and foreign exchange volatility variance swaps, according to GF Securities.

The hedge fund’s investments struggled with volatile foreign exchanges and shrinking market liquidity since August 2018, GF Securities said.

Pandion’s prime broker asked to increase its margin deposits to $129 million as of Dec. 31, GF Securities said. The fund had initially deposited $30 million. GF Securities’ Hong Kong unit, which holds a 99.9% interest in the fund as of the end of 2018, may face potential litigation, according to GF Securities’ statement Wednesday.

For 2018, GF Securities booked 15.3 billion yuan of revenue, down 29.4% from the previous year. The company’s shares dropped 1.15% to 15.48 yuan on Wednesday.

Contact reporter Han Wei (weihan@caixin.com)