Photographer: SeongJoon Cho/Bloomberg

Lime Asset Management Co., South Korea’s largest hedge fund with about $4 billion of assets, suspended withdrawals from more funds on Monday, freezing a total of $710 million of its portfolio, after the firm said last week it couldn’t sell assets fast enough to meet redemption demands.

The hedge fund halted an additional 243.6 billion won ($210 million) today after freezing funds worth 603 billion won on Oct. 10, Won Jong-Jun, chief executive officer at the Seoul-based firm, said in a press briefing this afternoon. A further 489 billion won of funds may also be restricted from withdrawals, he said.

Investors are seeking redemptions after local media speculated over the past few months about a Korean regulatory probe into the company’s investments in convertible bonds. Lime on Monday confirmed there was a probe but declined to comment on the investigation. An official at South Korea’s Financial Supervisory Service told Bloomberg Friday it’s investigating if Lime’s investments in convertible bonds breached laws and whether the issuers Lime bought CBs from are zombie companies.

“Due to the recent drop in the Kosdaq market and also declines in stocks of companies we’ve invested in, it became hard to obtain liquidity by converting the bonds into the stocks as we planned,” Won said at the briefing.

Sales of convertibles, which pay low coupons and let investors swap the securities for stock, have surged in Korea amid demand from homegrown hedge funds. Investments in domestic convertibles -- often sold by small- and medium-sized firms without credit ratings -- were also encouraged by the Korean government, which wanted to nurture the country’s young companies amid a flagging economy. The Kosdaq index is down 5% this year so far, making it less likely that hedge funds can book a profit from converting bonds into underlying shares.

READ MORE: Korea Hedge Funds Are Binging on Risky Bonds Without Ratings

Out of the total assets, Lime has invested about 400 billion won in convertibles and bonds with warrants, according to Lee Jong-pil, chief investment officer at the firm. The hedge fund aims to liquidate most of those debts within the next two years, Lee said.

The probe at Lime is worrisome not only for the fledgling hedge fund industry, which may suffer reputational damage, but also for smaller companies that rely on convertible bonds for funding. Outstanding won-denominated CB totaled about $11 billion at the end of April, according to the Korean Exchange.

Regulators this year have been closely watching the risks from the nation’s private funds, including hedge funds -- an industry that expanded rapidly after regulations were relaxed in 2015. The nation’s private funds managed 330 trillion won in total at the end of 2018, surpassing assets run by public funds, according to Korea Financial Investment Association.

“Because of the issues at Lime, other hedge funds that had no problem with their convertibles may face doubts from investors who may be reluctant to keep investing in CBs,” said Kim Pil-kyu, senior research fellow at Korea Capital Market Institute. “Maybe we need to make this bond market more transparent, but it won’t be that easy.”