By Margot Patrick From The Wall Street journal

Kijani fund, seized by regulators in Cayman Islands, spotlights risks in lightly regulated market

GIBRALTAR—On this tiny Mediterranean peninsula, a hedge fund run by a polo player has been seized by regulators, as part of a global probe into offshore funds, highlighting the risks lurking in this lightly regulated, multibillion-dollar market.

For four years, Richard Fagan’s Kijani commodities fund seemed to thrive in financing what it billed as environmentally friendly gold, oil and timber deals. The fund managed about $130 million and boasted average annual returns of 25%, according to the fund’s marketing documents. The tall, athletic 43-year-old became well known as the captain and sponsor of a polo team.

Now, Kijani is being scrutinized by regulators from several jurisdictions investigating a global network of about 100 investment funds marketed to wealthy individual investors. The funds, including Kijani, were all administered by the same servicing company based in Mauritius, an island about 1,200 miles off the coast of Africa in the Indian Ocean.

The license of the servicing company, Belvedere Management Ltd., was suspended by regulators in April in Mauritius as part of the global probe into the network’s governance and valuations of fund assets after complaints from investors, including redemption requests that couldn’t be met at other funds besides Kijani.

Richard Fagan started the Kijani Commodity Fund in 2011. The fund managed about $130 million in assets.

Investigations picked up following a report in March on a Miami website, Offshore Alert, that focuses on financial fraud, saying that Kijani’s returns looked too good to be true. Soon after, Kijani said it would perform an audit and suspend redemptions.

Kijani, which relocated last year to the Cayman Islands, was seized in June 2015 by the Cayman regulator under its powers to protect investors. Mr. Fagan and Kijani haven’t been accused of wrongdoing by any authorities.

People who worked with Mr. Fagan said some of Kijani’s underlying investments could prove worthless because they were in early stage projects with little realizable value. Mr. Fagan contests that, saying Kijani’s investments and investors have suffered from unsubstantiated allegations. “Our focus is on maintaining investments and shareholder values,” Mr. Fagan said in an email.

A Belvedere spokesman said the company isn’t aware of any investor complaints or any findings of civil or criminal wrongdoing by any regulators.

The episode serves as a cautionary tale for investors who lose billions of dollars every year in offshore funds.

The offshore funds usually promise high returns by investing in rarely traded assets such as undeveloped land and commercial forestry rights. Typically promoted by financial advisers to retirees, expatriates and other individual investors, the funds have slick marketing documents but often provide little information on their specific holdings or portfolio managers. Kijani hasn’t disclosed its investment holdings.

The U.K. financial regulator started a crackdown in 2013 on retail sales of the funds after several offshore vehicles investing in life-settlement policies, student housing and property development collapsed. Life settlements are life-insurance policies typically sold by ill or elderly people to investors.

The regulator estimates that Britons have the equivalent of about $86 billion in such offshore funds, including investments by pension funds and other institutions.

Kijani’s web of relationships highlights the difficulty faced by regulators in keeping track of such funds.

The main company, Kijani Resources Ltd., of which Mr. Fagan is a major shareholder, was set up in Gibraltar, a British territory on the south coast of Spain trying to establish itself as a financial center, and made the investments. The Kijani Commodity Fund, based in Mauritius, handled the job of raising funds from investors.

The structure appears to have resulted in Kijani Resources avoiding oversight in Gibraltar, said Samantha Barrass, chief executive of the territory’s financial regulator. “This has all the hallmarks of things that regulators worry about,” Ms. Barrass said, referring to the broad investigation into the funds linked to the servicing firm in Mauritius.

Mr. Fagan said the company doesn’t need a license in Gibraltar because it isn’t an investment manager.

The Gibraltar regulator is working with its counterparts in the Cayman Islands and elsewhere, Ms. Barrass said. The Mauritius regulator said it no longer supervises the Kijani fund and is investigating some of the fund’s former service providers. The Cayman Islands regulator declined to comment.

Kijani’s troubles come as a collapsing market for raw materials has hit commodity-trading firms across the globe, with some firms closing down funds or shutting operations entirely.

British born Mr. Fagan used to run a family auto-repair chain. Around 2007, he moved to Gibraltar and started working in its funds industry. Kijani means “green” in Swahili, and Mr. Fagan pitched its investments as socially responsible, saying it made money by dealing in an ethical way with small commodities producers, according to a video of a 2013 presentation in Israel. He described Kijani as “the commodity equivalent of fair-trade coffee.”

The Kijani fund, which was started in 2011, was marketed to wealthy individual investors in Asia and the Middle East. Its assets rose sixfold from 2012 to early 2015, to about $130 million, according to fund marketing documents.

It didn’t actually invest money itself. Instead, it lent money to Kijani Resources, which did the investing through an array of companies and special-purpose vehicles. Among investments, it bought forestry rights in Suriname, a small country on Brazil’s northern border, according to a filing. Last year, it sold a Delaware-registered West African oil-services company for £10 million ($15.6 million), according to a filing. It was paid in shares of a U.K. company Kijani Resources also controlled.

The Cayman Islands regulator asked PricewaterhouseCoopers to conduct a forensic audit of the Kijani fund this past April. People familiar with the audit said the Kijani fund’s only asset was a loan to Kijani Resources. Mr. Fagan said “the only investments into Kijani [Resources] were by way of a commercial loan.”

Meanwhile, as the Kijani fund’s assets mushroomed, some investment advisers wondered how it consistently achieved double-digit-percentage returns. “People were saying it was the hottest thing, but the economics of the strategy didn’t seem to make sense,” said Owen Caterer, a partner at Shanghai investment-advisory firm Caterer Goodman, which cautioned clients against putting money in the fund.

Early on, Kijani got $5 million of seed capital from a company owned by Iraq-born billionaire Nadhmi Auchi. The money was for trades involving gold from a mine in Ghana, among other things. In 2012, the company asked for, and received, the money back.

“We got cold feet,” said Arif Husain, an executive at Mr. Auchi’s company. “We didn’t see anything demonstrable being achieved, so we asked for our money back.”

According to the Kijani fund’s marketing documents, the fund charges investors 2% of the assets it manages and 25% of its returns, roughly typical for a hedge fund.

Former business associates said Mr. Fagan lived a lavish lifestyle, including his polo career. His polo team, Silex, is a main sponsor of events at the Santa Maria Polo Club, a social hub for Sotogrande, a gated private development in southern Spain, and neighboring towns. Mr. Fagan sometimes plays on a national polo squad for Ireland.

Through one of his companies, Mr. Fagan bought a 116-foot yacht in late 2012, people familiar with the purchase said. He named it Ratio. The yacht has four staterooms and sleeps about 15 people.

IMAGE: Richard Fagan at the St. Moritz World Cup. PHOTO: ANA CLARA COZZI

For more on this story go to: http://www.wsj.com/articles/fund-caught-in-snare-of-global-probe-1438639752