Scenario: A mutual fund manager purchases a forward to hedge their currency risk. He reneges on the contract at settlement and the contract is out of the money. Who can we be taken to court for the loss? The mutual fund? The actual management company? Thank you in advance
It’s hard to believe that has ever happened or is likely to happen. The mutual fund assets are used to pay up on the forward contract and it’s tough to believe that there is a mutual fund out there that would take a position in a forward contract that could eat all its assets. In any event, if some a_hole mutual fund manager tried to renege so it didn’t impact his NAV, a phone call to his boss would probably take care of the problem. If there was no boss, you would just sue the fund. No reputable fund company would ever let this happen.
Thanks Joey. Just wondering
I agree that the scenario is unlikely. Legally, I believe the fund company is liable, and the fund company presumably has compliance and risk management processes designed to detect contracts that are likely to blow up like that. If somehow the manager evaded these processes to enter the contract, then the manager most likely becomes liable for fraud from the counterparty and the fund.
The actual fund company has very limited assets compared to the actual fund. Probably structured this way to protect themselves?