Hong Kong Hedge Fund in Disarray

A once-flourishing Hong Kong hedge fund has been shut down by regulators and up to $56 million in investor money is missing after the arrest of its manager, officials said Wednesday.

The fund probably will be liquidated once the chaos is sorted out, according to a letter sent to investors.

CSA Absolute Return, a fund of hedge funds run by Hong Kong-based Charles Schmitt & Associates and managed by founder Charles Schmitt, was frozen Wednesday by the Hong Kong Securities and Futures Commission. The commission acted on a tip provided by the management firm's chief financial officer and managing director.

CFO Jennifer Carver initially told investors of the blowup Tuesday, writing that she and MacDougall "came across some internal documents that led us to suspect irregularities in the CSA Absolute Return Fund, managed by Charles Schmitt."

In a second letter Wednesday, Carver said Schmitt is in police custody and that regulators had frozen all accounts connected to him and the fund while the debacle is investigated. Of $197 million invested in the fund, $141 million had been located, Carver wrote.

"Most likely, once we find all the assets, the fund will be liquidated and assets will be returned to individual investors, so there is no real point to sending us redemption requests at this time," Carver wrote.

"We still have to confirm completely that this money belongs to the fund, but we are fairly confident that this is the case," she wrote. "We are still looking through the accounts that have been frozen and are hopeful that we will find more."

The securities commission said Schmitt's explanations for what happened to the money have been unconvincing.

"Based on the intelligence received and further information gathered by an SFC team, the SFC met Mr. Schmitt yesterday, who was not able to provide satisfactory answers regarding transfers of client monies into bank accounts with which he is connected," the commission said Tuesday. "Based on information so far, the SFC believes that the case might be an isolated case of misappropriation and concerned the conduct of an individual."