Hedge Funder Says Massive Heist May Have Been Macau's 'Lehman' Moment

In April, Huang Shan, a shareholder in the Kimren Group, one of Macau's top high-roller promoters, took $1.3 billion worth of the company's money and vanished.

Now Macau's entire junket funding system is facing a crisis of faith that could change the face of Asia's gambling Mecca as we know it.

"It's been a great ride - up until the point this $1.3 billion was stolen," says Jason Ader, founder of hedge fund SpringOwl and an investor in Macau's gaming industry. "All the sudden investors and junket operators were facing a loss, and the prospect that these returns are not guaranteed."

That's when Macau had what Ader calls its "Lehman Brothers moment."

To understand why this is such a shake-up, you have to understand how China's real high-rollers in Macau play. They go to VIP rooms to bet big, and those rooms are operated by junkets (the junkets can also be called VIP junket operators or VIP room promoters).

The gamblers get treated like royalty, and the junkets make money from their games. Win or lose, the junkets take a cut of every wager placed in a game. That's called "rolling chip volume."

In this model, investors in these junkets make 1-2% "guaranteed returns". Huang, the guy who made off with $1.3 billion, was guaranteeing investors an unheard of 2.5%.

When Huang disappeared with all that cash, though, investors started to demand more return for their risk. Plus, there was less money flying around to host games, so there was less money being made off the gamblers.

"Investors started to think - 'maybe this isn't worth all the brain damage,'" said Ader.

As a result of this crisis of faith, some small listed junket firms have taken a beating. Over the last year, one junket listed on the Nasdaq, Iao Kun Group Holding Company Limited (formerly known as Asia Entertainment & Resources), is down 20%.

There is, however, a bright shining light here. China's middle class is ascending and becoming a higher margin customer for casinos. Mass market gamblers led the charge in Macau's 20% year over year revenue surge last quarter. The completion of infrastructure projects like the bridge between Macau and Hong Kong and a high speed rail connection to the mainland will ensure that more of them can go to Macau and play.

So instead of Macau being a haven for gangsters and high-rollers, it'll be like Las Vegas now - a city of watered-down sin with kiddie pools and Celine Dion shows.