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

Discussion in 'Risk Management' started by helpme_please, Nov 21, 2018.

  1. 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.


    I never know such a thing can happen as an investor in professional funds. I always assume risk is limited to 100% loss which is bad enough as a worst-case. I didn't know risk can be unlimited.

    This is certainly a risk that all clients must be aware of. What are the kind of funds or fund structure to be aware when investing in professional funds to avoid this kind of unlimited risk? Do clients of CTA face such a risk?

    When Amaranth and LTCM blew up, did their clients lose more than 100% of their losses?
  2. Robert Morse

    Robert Morse Sponsor

    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.
    helpme_please likes this.
  3. That is not being 100% truthful. The 100% honest truth is that clients can lose MORE than their entire investment. When investing in CTA, clients must be aware that the account is separate managed and they can lose more than 100% of their investment.
  4. Robert Morse

    Robert Morse Sponsor

    helpme_please likes this.
  5. Thank you very much for highlighting the risk in investing in CTAs. Knowing can save many families of financial hardship just in case bad things happen. Not saying CTAs are bad as an asset class but such a terrible risk should be underlined in bold in the risk disclosures and not clouded in half-truths.
    Last edited: Nov 21, 2018
  6. Robert Morse

    Robert Morse Sponsor

    It is not common. Most CTAs are not option sellers, use less than 20% of Span margin. Please don’t put them all in the same bucket.
  7. That's a separate issue. It's about proper risk disclosure to clients.
  8. Robert Morse

    Robert Morse Sponsor

    They do. It is required by the NFA. Would you like to see a Disclosure document from an CTA? I can email it to you but I'm not going to post it.
  9. guru


    I don't think you can lose more than 100% in a typical hedge fund operated as an incorporated entity (or LLC) and managing your money in their account. The fund would be liable for any losses beyond your investment (as far as I know).
    Amaranth didn't lose 100% of the money, while LTCM was bailed out.
  10. I thought they stop at disclosing investment can be lost 100%. If they state clearly than more than 100% can be lost, it's fine.

    Limited risk and unlimited risk are worlds apart and ought to be highlighted clearly to clients.
    #10     Nov 21, 2018