Top 10 biggest hedge fund blow ups of all time

Hedge funds have come a long way since Alfred Winslow Jones founded the first hedge fund A.W. Jones & Co. in 1949. According to the data group Hedge Fund Research, there are more than 15,000 hedge funds worldwide. They collectively manage an estimated $3 trillion worth of assets. Here we take a look at the top 10 biggest hedge fund blow ups of all time.

UPDATED 2/27/2020 with extra information about Platinum Partners

Unlike banks and other financial institutions, hedge funds are not highly regulated. They employ all sorts of strategies to protect your money from the uncertainties of the markets. Hedge funds aim to deliver positive returns in both bull and bear markets. They invest across stocks, bonds, commodities, currencies, and other asset classes.

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Over a thousand hedge funds went bust during the 2008 financial crisis. Hedge funds blow up for a number of reasons including poor risk management, excessive leverage, and fraud. When lenders sense that a hedge fund is no longer profitable to operate, they could seize the assets the fund has pledged as collateral. Investors end up losing a huge chunk of their money. Sometimes, regulators have to step in to protect the interests of investors.

These are the ten biggest hedge fund blow ups of all time:

10- Lake Shore Asset Management, 2007

Chicago-based hedge fund Lake Shore shut its shop in 2007. Lake Shore’s managing partner Philip Baker had raised $294 million from 900 investors worldwide by promising annual returns of as high as 55% between 2002 and 2007. In reality, Lake Shore was incurring millions of dollars in trading losses, which it was hiding from investors.

Philip Baker was also found guilty of misappropriating at least $30 million of investors’ money for his own use and for another Lake Shore director. In 2011, Baker was ordered to pay $155 million in restitution, representing the outstanding losses to investors. He was also sentenced to 20 years in prison.

9- Askin Capital Management, 1994

Askin Capital had an estimated $600 million between its three hedge funds. Its founder David Askin invested almost all the money in mortgage-backed securities. His big bet backfired when the Federal Reserve began raising short-term interest rates dramatically in February 1994 for the first time since 1989. Askin investors lost almost all their money. David Askin was barred from the securities industry for two years. Interestingly, he had launched the hedge fund only one year prior.

8- Sowood Capital Management, 2007

Sowood Capital was a Boston-based hedge fund run by Jeffrey Larson, who had previously served as Harvard’s endowment manager. Harvard had invested $500 million in Sowood. The hedge fund lost about half of its $3 billion in the month of July 2007 amid the credit market turmoil. About $350 million of Harvard’s investment was wiped out. Sowood had to shut shop and sell its positions to Ken Griffin’s Citadel.

7- Lancer Management Group, 2003

Lancer Management was one of the biggest hedge fund blow ups of all time. The Securities and Exchange Commission found in 2003 that Michael Lauer-led Lancer Management Group was inflating the performances and net asset values of three of its funds to pump up valuations and attract investors.

Lancer had about $1 billion in AUM. It was investing primarily in penny stocks, which are relatively easier to manipulate. When the SEC launched its investigation, the hedge fund was forced to sell the illiquid penny stocks at dirt cheap prices. The fund was eventually shut down.

6- Parkcentral Global Hub, 2008

Bermuda-chartered hedge fund Parkcentral had about $2.5 billion in AUM right before the 2008 financial crisis. It seemed like a well-managed hedge fund. Parkcentral assured investors that it would not employ more than 5% of assets to any single strategy. But it made a huge unhedged bet on mortgage-backed securities. By the end of November 2008, its assets vanished into thin air.

5- Lancelot Investment Management, 2008

Illinois-based Lancelot Investment Management lost more than $1.5 billion in a Ponzi scheme orchestrated by Minnesota businessman Tom Petters. Lancelot lent $1.5 billion of its $1.8 billion AUM to Petters. But the hedge fund failed to validate the purchase orders and inventory that Petters’ businesses had used as collateral for the loans. Petters also defrauded many other hedge funds. Lancelot Investment filed for Chapter 11 bankruptcy in 2008.

4- Platinum Partners, 2016

Mark Nordlicht-led Platinum Partners was consistently delivering market-beating returns. Between 2003 and 2016, its annual returns were 17%. Or at least that’s what the hedge fund wanted its investors to believe. In December 2016, Mark Nordlicht was arrested for perpetrating a $1 billion Ponzi-like fraud. The hedge fund was soon shut down. In June 2019, Nordlicht was originally found guilty of defrauding an oil company controlled by Platinum Partners.

However, an initial guilty verdict on unrelated charges was immediately thrown out. Mark Nordlicht was acquitted of all charges related to defrauding hedge fund investors. A federal court district Judge threw out a guilty verdict relating to an oil company controlled by Platinum Partners.

3- Bear Stearns Asset Management, 2008

In 2008, the SEC charged two Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin of fraud. The two portfolio managers misled investors about the exposure of their funds to subprime mortgage-backed securities. Both the highly leveraged funds collapsed in June 2007. As the value of their funds continued to decline in the first few months of 2007 and investors redeemed their money, the two portfolio managers hid the facts about growing troubles until the funds collapsed. It caused investors a loss of approximately $1.8 billion.

2- Long-Term Capital Management, 1998

Long-Term Capital Management had a pretty short lifespan. Launched in 1994, the infamous hedge fund ranks among the biggest hedge fund blow ups of all time. Long-Term Capital delivered an impressive 21% return in its first year, 43% in the second year, and 41% during the third year. It was flying high when it suddenly fell flat on its face by losing $4.6 billion in the first few months of 1998.

Hurting its performance were the 1997 Asian financial crisis and 1998 Russian financial crisis. With the backing of the Federal Reserve, more than a dozen firms came together to provide it a $3.6 billion bailout package to keep it live. The hedge fund was eventually liquidated in 2000.

1- Amaranth Advisors, 2006

Greenwich, Connecticut-based Amaranth Advisors had about $10 billion in assets under management. The hedge fund’s star trader Brian Hunter made a multi-billion dollar bet in the energy market without realizing the full risks. It’s quite surprising that Amaranth deployed several billions of dollars on a single bet despite it being a multi-strategy hedge fund. It lost more than $3 billion on energy trades in a week. The hedge fund lost a total of $6 billion on risky bets that led to its collapse. Ken Griffin’s Citadel stepped in to purchase a huge chunk of Amaranth’s remaining portfolio.