This question may sound silly to some of you for which i apolagise. My question is if a person is running a one man hedge fund. Small one, somewhere around the lines of 50MM and he leverages it 4 times giving him 200MM in hand to play with after which the fund runs into lossed wiping out the initial investor capital. How much is the manager financially liable for. What i’m trying to ask is what sort of financial trouble can a one man hedge fund manager get into. And are there ways of insuring safety.
If he’s done his paperwork right and there’s no fraud or other ways through the veil, the hedge fund manager isn’t liable for anything.
Interesting. I thought that most LLC companies still needed to have at least one general manager who is liable for everything. However, if the legal paperwork is done, it does mean that the person’s home and personal assets are not at risk. I am not sure how blowing up affects a credit rating though. The guys who provided the $50MM of capital are out, since they knew they could lose their entire investment, but are the guys who provided the $150MM of leverage just SOL (presumably their fault for not requiring some kind of collateral)?
the “guys” who provided the $150MM is the prime broker, and yes they are out. recall LTCM.
bchadwick Wrote: ------------------------------------------------------- > Interesting. I thought that most LLC companies > still needed to have at least one general manager > who is liable for everything. Are you confusing Limited Liability Company with a Limited Partnership? The latter has a general partner who has operational authority, and has more corporate-misbehavior exposure than the limited (financial) partners.
Yep. An LP needs to have a general partner, but that partner doesn’t have to have any particular assets or ability to pay although they do have liability. Since you can make some shell corporation the general partner, the world decided that we needed a pass-through entity with complete limited liability hence the LLC. A typical hedge fund arrangement is to set up two LLC’s, say Chadwick Capital Management, LLC and Chadwick Funds, LLC. Then you set up at least an LP of which Chadwick Funds is the General Partner. Chadwick Funds serves as the GP for the fund, distributes money to the partners, collect fees from partners, etc. Chadwick Capital owns the intellectual property of the fund as well as the office furniture, etc… When you bring in a client they become a member of the LP. When you bring in a new partner, they probably just become a member of the LLC that does trading but not that owns the intellectual property. That way when you want to dissociate that person, they have no interest in intellectual property and you stay out of legal battles where your accountant/CFO wants to claim ownership of your trading algorithms.
So eventually who takes the hit, The prime broker or investors ? What if the fund manager has taken the leveraged part giving a personal guarantee ??
If the fund manager has given a personal guarantee, he is the stupidest person in the world. He’s guaranteeing trading losses beyond the capital of his clients? The investors are completely exposed to the amount of money they have in the LP and can lose all of it but not a penny more. Any number of people can be hit beyond that including prime brokers (and obviously their capital providers), clearinghouses, trade counterparties, the tax payers, …
"I thought that most LLC companies still needed to have at least one general manager who is liable for everything. " Limited Liability Company means that owners’ LIABILITY is LIMITED.