In a HF, investors are limited partners of the fund whose losses are capped and limited only to the funds they invest. How do hedge funds prevent a situation where they owe a broker more than the fund's total equity? (in a situation like the CHF blowup, for ex.). It would therefore be the HF not its investors who would owe the brokers based on funds that the HF doesn't even own! It would seem to me that give this, running a hedge fund is very risky, what am I missing here?
Hedge Funds are LPs. The brokers can't go after the partners personal assets unless they sign a personal guarantee. That personal guarantee not a typical document. The same is true for LLCs and corporations like a S-corp or C-corp.
The SEC will go after you and lock you up. http://www.businessinsider.com/possible-investigation-into-canarsie-capital-2015-3
Interesting article, which includes the following paragraph: [The only details provided in the letter about the positions are that they included "options with strike prices pegged to the broader market increasing in value" and "some direct positions."] If he bet aggressively in options with time decay, and those bets went against him, then it's certainly possible to lose a lot of money. It doesn't say whether his "direct positions" were using leverage/margin. It seems there is more to this story. He was formerly working for Raj Rajaratnam, and we know what happened with that firm. I'm surprised there was no risk management in place to kill the trades after a certain percentage of loss in any given day/week/month. Either he's one lousy trader, or perhaps there were fabrications in his P&L as the article suggests, and that is why DOJ/SEC are investigating. In any case, it's bad news for the investor who put up the $1 million of minimum capital required to join the fund.