How do you lose it all in a hedge fund?

Question

Last week my friends husband told her that all of their accounts were at a zero balance and mumbled something about hedge fund. They are moving out of their 7 million dollar home.

What happened?

Answer 1

This is not a field for armatures.

Hedge funds are high risk investments where the managers are highly compensated with 20% of the clients' profits and none of the losses.  The managers take 2% of assets up front, just for trying.  If the fund crashes, the remaining assets, if any, are returned to the clients and the managers start a new hedge fund.  They frequently use client money as collateral and borrow a bunch, which means that in a good year, profits go to the moon, but in a bad year, losses accumulate just as fast.

I'm sorry about your friend.

Answer 2

Chuckle, ya gotta love it.  Who says the rich are smarter than the rest of us??

Answer 3

May be a CDO problem

   They made a highly leverage bet and lost

     somebody ran off with the money

     Read about Long Term Capital

Answer 4

Leverage is a double edge sword.

Hedge funds are leveraged 30-1

If you lose a small amount of money, you get wiped out.

P.S. Let this be a lesson to you. LEARN TO MANAGE YOUR OWN MONEY!!!

Answer 5

Hedge funds make big bets.  Sometimes especially when such things as CDOs become virtually worthless these big bets go belly up.  At other times the manager of the funds takes the money an moves to the south sea islands.  

Consider this.  If Citigroup can loose billions on those leveraged bets, a hedge fund can too.

Answer 6

Some hedge funds take $100 million in investors money, borrow $500 million with promises and smiles, and then invest the $600 million.  The investments go down to $500 million value, the banks call in the borrowed money, and the fund is left with zero.

Oh wait -- the hedge fund managers make sure to collect their fees first, for their "expert" advice.  Nothing illegal about it, after all, they told you about the risks up front!