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. themickey

    themickey

    4717538-Warren-Buffett-Quote-In-our-view-derivatives-are-financial-weapons.jpg
     
    #31     Nov 22, 2018
  2. 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.
     
    Last edited: Nov 22, 2018
    #32     Nov 22, 2018
    JSOP, comagnum and themickey like this.
  3. ironchef

    ironchef

    The question is how can you lose more than your entire investment?
     
    #33     Nov 22, 2018
  4. sss12

    sss12

    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
     
    #34     Nov 23, 2018
  5. ironchef

    ironchef

    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.
     
    #35     Nov 23, 2018
  6. JSOP

    JSOP

    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.
     
    #36     Nov 23, 2018
  7. JSOP

    JSOP

    Coming from a guy who trades options himself. LOL He was right though about cryptocurrencies.
     
    #37     Nov 23, 2018
    themickey likes this.
  8. ironchef

    ironchef

    Yet he traded options. I guess in the right hands, weapons of mass destruction are very effective weapons. :finger:
     
    #38     Nov 23, 2018
    JSOP likes this.
  9. Robert Morse

    Robert Morse Sponsor

    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.
     
    #39     Nov 23, 2018
  10. prc117f

    prc117f

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


     
    #40     Nov 23, 2018