What sort of fund structure can cause clients lose more than 100% losses when the fund blows up?

[themickey]

 

[Scataphagos]

When optionsellers blew up, the clients not only lost 100% of their invested money but owe money to the broker as well. In other words, clients lost more than 100% of their money. The risk is unlimited.

Bottom Line.... whenever your money is "involved" in leverage (managed by yourself or your agent), there is always/almost always the possibility of losing more than your account... stocks, options, futures, pooled assets, et al. Includes real estate in some cases (full recourse financing).

One way to avoid this possibility in the equity markets... play leveraged ETFs. You still get the benefits of up to 3x leverage, but you won't get margin calls or incur debits. (Caveat Emptor)

Risk management is ALWAYS paramount.

 

[ironchef]

SMA-Separately Managed Accounts-Each account was in the name of the client. That is the way most CTAs do business. The disclosure on every CTA doc says you can lose your entire investment.

The question is how can you lose more than your entire investment?

 

[sss12]

The question is how can you lose more than your entire investment?

In the simplest and extreme example :
You buy at 10 putting up 3 and borrowing 7= liq net is 3
Your 10 investment drops to 1. Now your liq net is 1 - 7=-6

 

[ironchef]

In the simplest and extreme example :
You buy at 10 putting up 3 and borrowing 7= liq net is 3
Your 10 investment drops to 1. Now your liq net is 1 - 7=-6

Thanks. My mistake was I thought Optionsellers was a hedge fund and investors invested in a hedge fund should not lose more than what they put in. Didn't understand they were a CTA trading their client's account.

 

[JSOP]

Thanks. My mistake was I thought Optionsellers was a hedge fund and investors invested in a hedge fund should not lose more than what they put in. Didn't understand they were a CTA trading their client's account.

You are not alone. Everybody thought it was a hedge fund thanks to that guy in the apology video terming it so until it was revealed that he was trading on the clients' behalf with POA's.

 

[JSOP]

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Coming from a guy who trades options himself. LOL He was right though about cryptocurrencies.

 

[ironchef]

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Yet he traded options. I guess in the right hands, weapons of mass destruction are very effective weapons.

 

[Robert Morse]

The question is how can you lose more than your entire investment?

Futures are leveraged products and they were short options. The Margin requirement for those positions does not represent the most you can lose, just what the exchange requires. In addition to what the CME requires, INTL FC Stone has additional risk requirements of a shock of +/-10% and a vol shock of 20 points. The moves must have exceeded that or the manager ignored risk calls. In fact the buy-ins from risk could have helped exacerbate the losses.

 

[prc117f]

Warren Buffet trades options on the S&P 500. So its funny he says that and does something else.

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