What risk management mistake did optionsellers.com fund manager do to blow up his fund and clients?

qlai said:
But they are the ones that will take the hit in that case, right? That would be a bad precedent. But I do think they should have had more oversight and thus are partially responsible, imho. Let's see.
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Exactly. They should've stepped in lot sooner to auto-liquidate the positions when they saw the huge losses amassing in the account when the trader was too chicken s*** to pull the trigger especially when they know that the leverage was high in the account. So yes, they partially contributed to this problem. They should've done more to control the margin shortfall.
 
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JSOP said:
Well apparently he did hedge with a 12:1 ratio so basically he was buying 1 long call to every 12 shorts thinking that would be enough.
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How though... Assuming fat tail events happen (not even fat tail), would expect it in November, that would never hold.
 
nooby_mcnoob said:
How though... Assuming fat tail events happen (not even fat tail), would expect it in November, that would never hold.
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I know I agree it wouldn't even hold in thin-tail events. LOL But then again he thought with thin-tail events, his deep OTM strikes won't become ITM and even if they did, his 1 long call would be able to cover his 12 shorts. LOL

I just feel really bad for his clients. The minimum amount that they have to deposit with him was $500K and apparently the largest account size was $10 million and he had 290 clients. And btw, he wasn't running a hedge fund. His clients were giving him POA to trade their personal accounts on their behalf. This is why all of the clients are on the hook for all of the debit balance owed to the broker and he's off the hook.
 
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