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As many of you know, it has been a difficult period for me and my family. My wife had a second stroke last month and had to do a brain surgery last week to remove a brain stem cavernoma. I'm glad to report that the surgery went well, and she is now recovering in rehab. It is still a long process, but the most difficult and risky part is behind us. I would like to thank everyone for your support and good wishes! I'm very fortunate to have such great community, both on professional and personal level. The number of emails and messages was really overwhelming. Special thanks to our dedicated team of mentors (@Yowster @SBatch and others) for covering during my absence. I expect to be back in full force shortly and to continue providing the same level of support and service you are all used to. Happy Thanksgiving and happy trading during those challenging times!

A few things on this one, as this obviously held a great deal of interest to me. First, how did the fund actually blow up AND have its investors subject to capital calls from the broker, that should NEVER happen. This obviously is a major concern of mine due to the fact that we run several funds. Second, how did he actually blow up from an investment standpoint. The answer to the first is simply once I started looking at it, though terrifying in the level of incompetence displayed by this manager because (1) he probably didn't use an attorney in setting this all up or he could of avoided these losses or used an attorney that didn't know what they were doing and (2) that these high net worth individuals didn't know what they were doing or getting into. Which means they weren't adequately informed/disclosed or simply didn't read the documents. He also likely was not licensed to setup and run this as a fund structure, even if that would have been better for the investors. The media keeps referring to this as a "hedge fund." But that is NOT what it was. It was 290 separately managed accounts, all trading the same strategy. It's what we did when first starting the Steady Options Fund. Whereas a hedge fund is an actual "company," typically a limited partnership or limited liability company, that insulates investors from losing more than they invest (unless specifically structured to make investors liable, which is VERY rarely done). Then all of the accounts are traded "in unison" with each other, also known as block trading. On a simple level, imagine 3 accounts, each with $333,333.33 in it. That's a total of $1m. So when the trader goes to trade, he trades into a block account with the full $1m, then the results of those trades are distributed to each individual account. The wheels started coming off here. Since these are block accounts, that means EACH client owns their own accounts and is responsible for them. So if he loses MORE than is available in the account, the account owner gets the bill....not the fund "manager." Traditionally you can get about 16x leverage trading oil futures contracts, based on the margin requirements (though with oils recent major drop offs those margin requirements are now higher). Using some actual older prices, this means to open a $90,000 oil and gas position, each account would have to only invest $5,610. So if an account had $56,100 in it, he could purchase a position worth $900,000. Then if the price of oil goes up 1% (and he's long) then his investment would go up close to 16%. This is not abnormal, and exists in the normal option trading we do too. However, that is just really, really, really poor risk management to use that much leverage. For instance, in the Leveraged Anchor account, we use about 2x leverage -- AND have a "pure" hedge. (Meaning we're long SPY and own SPY puts). Even if the market goes to $0 (or if SPY goes to $1b per share), the accounts can't get blown out. Which gets to his second mistake. Using natural gas to hedge oil, under the theory that they move in the same direction roughly 90% of the time. That figure actually holds pretty well, I found TEN crosses in the last 10 years. So on a daily basis, typically if oil goes up, so does natural gas. Not at the same rates, but they normally move in the same direction. So this guy did a basic statistical analysis and sold oil puts somewhere between 2.5 and 3.0 standard deviations out and bought on the natural gas side, also 2.5 to 3.0 standard deviations out. The theory meaning that the price of EITHER wasn't likely to move over 2.5 standard deviations and if ONE did, then both were likely to do so, thereby hedging losses. Only they BOTH did (to a massive amount actually) and they moved in OPPOSITE directions. So his hedge actually made his losses worse. (E.g. not a true hedge). I watched his video and have read a lot on this, for some reason, despite this happening on average once a year, he didn't see it as a real risk. So he had on a 10x leveraged oil position and a 10x leveraged gas position. And both prices moved over 100% on him. Which gets us back to those pesky margin requirements. Margin is NOT static. So If I bought that $90,000 position for $5,610 of margin, when the price starts moving against me, I have to put up more margin, because the risk to the position increases. It's not uncommon to see margin requirements double, or triple, in a very short time period. Well his margin requirements went THROUGH THE ROOF. That $100,000 account now had a margin requirement of over $100,000. This means he's now subject to a margin call and has to either liquidate positions or put more cash up. He did neither, which means all those accounts got forcible liquidated....but after the prices had moved even more. Now that $100,000 account has a value of -$50,000, of which the owner is responsible for putting up. And since these are separately managed accounts, that means each separate "investor" is responsible for their share. I have never taken on an options position where this could happen. Even if there is a naked option position, which I have used at times in my life, I don't use margin to lever it up. Let's say I'm short a 100 put on a stock worth $105. The MOST I can lose on that trade is $10,000 (per contract), so in an account of $100,000 you'd just never sell more than 10 puts --- even if the margin requirements were only $1,000 and you could sell 10x that much. You have then created the scenario of account blow outs. These things only happen to people that don't understand risk or don't care or are idiots or are greedy idiots....or fill in your superlative here. The Steady Options Fund PERFORMED poorly, but it was not poorly risk managed. We didn't get blown out by a position, our positions just collectively lost money. If you buy AAPL stock and the price drops 20%, you are not at risk of blowing out your account AND owing more money. The most that can happen to you is going down to zero -- which only happens if you're 100% long AAAPL when the price goes to zero. Options, used rationally, REDUCE risk. Used irrationally, the greatly increase it. This guy obviously went the second route.

I guess this was the part that I missed.... "The discussion and creation of hedge fund marketing rules is relatively new. Prior to September 2013, hedge funds were not permitted to advertise."

If one only accepts Qualified Clients (a higher bar than Accredited Investors as $2 million of semi liquid assets are required) registration is not necessary, but rather simply a filed exemption.

What also amazes me is that he is not registered (as far as I could tell on BrokerCheck) as either a broker or RIA. Which means HOW THE HECK did he even get permission to trade this accounts? I'm guessing its the same online shenanigans that you see with a lot of "advisory services" out there, but I wouldn't be surprised if there's not a coming criminal investigation to him not being properly registered. Boggles my mind. And infuriates me -- the amazing level of scrutiny we get on EVERYTHIGN (down to font sizes on pages), while a very large number of people don't even ATTEMPT to comply with the rules. I would MUCH rather see various state securities boards to be investigating and pursuing those who refuse to play by any rules as opposed to subjecting those who do everything they can to audits and fines for not having your license hung at the right height off the floor or not having proper margin sizes on investor bills.