If she liquidates her fund today the losses would go from "paper" losses (unrealized) to actual losses (realized). They would go away and the investors would get stuck with it. What's unreal to me is that her monthly accounting was not based on the fund's net liquidation value or mark to market - in reality there's no such thing as a paper loss - there's only mark to market.
What a fucking disgrace. According to the SEC complaint, Karen's fund pays the incentives to the fund manager based on realized gains, and unrealized losses are basically ignored. With that kind of incentive structure, any monkey can be a super star manager. You perpetually roll your losing positions over to the next contract, thus indefinitely postponing the realized losses, and get regularly paid on the realized gains. That's a totally genius scheme, and yes, a fraudulent one. Seems like every time we hear about an extraordinary market performer, he or she turns out to be a common financial fraud/thief.
Isn;t this illegal? what that genius, since they figured it out . More like do the crime pay the fine
If you want to see exactly how she ran the scheme... https://www.sec.gov/litigation/complaints/2016/comp-pr2016-98.pdf
One of the more egregious elements of her deceptive scheme is in paragraph 97 (emphasis in bold): "For example, in October of 2014, Hope experienced massive trading losses as a result of volatility in the market. The HI Fund and the HDB Fund collectively ended the month with unrealized losses of approximately $100 million, most of which resulted from the October trading losses. Nevertheless, Hope reported to investors that the Funds had millions of dollars’ worth of “realized” gains in October and collected incentive fees of more than $600,000."
The gullibility is also on the part of the main investor who didn't understand the calculation of how she booked profits. These are supposedly "sophisticated investors" as defined by SEC, and they have access to hedge fund attorneys who can evaluate the private placement memorandum BEFORE investing. However, it's just people with high net worth and more money to lose. So when they get duped, they lose big. I'm not sure what connection she had with this early private investor. Obviously there was a level of trust from the onset, which was eventually broken. The NFA conducted an audit of her trading style in 2013, but instead of notifying her investors, she continued engaging in the allegedly fraudulent trading scheme. "Investor A understood that Hope was taking a 20% share of monthly profits, but he did not understand the mechanics on how it was calculated." (see complaint at paragraph 52). Paragraphs 58-63 sums up the "trading scheme."
You're exactly right, it was indeed a ponzi scheme. See complaint at paragraphs 105-108. https://www.sec.gov/litigation/complaints/2016/comp-pr2016-98.pdf The most revealing part of the ponzi is in paragraph 108, quoted below (emphasis of the ponzi in bold): "The manner by which the HI Fund pays redemptions (excluding unrealized losses) creates a risk that, if the unrealized losses continue or there is a significant exodus, the last investors to redeem will not get any money. That risk is not expressly disclosed to investors." Perhaps if she simply disclosed this risk, the complaint would have less merit. However, my guess is the SEC would still charge her and her fund with securities violations based on her collection of incentive fees despite the fund having lost money, since she clearly had a defined a "high water mark" in the fund's prospectus.
lol, good one. I remember watching her interviews on YouTube and believed the results, so I guess I was duped by her incredible trading abilities. Perhaps she's an accomplished CPA with 25 years of experience, but that's no excuse to then mask the losses to her investors. What's more sad is she actually was giving 50% of her fees to a charity, and now the SEC claims the charity was not entitled to the gains since they were "ill gotten" gains. Here's one of the interviews...
Does this mean we can now stop using this conwoman as the poster child for the "theta edge"? What do you say guys?
All hedge funds are kind of rather crooked, in my opinion. It's just simply the nature and structure of the game -- to mainly benefit them only. The sheep masses gets the shaft, as usual.