The fund manager who ‘lost’ billions in a single day

Fund managers are celebrated when markets rise and condemned when portfolios collapse. Most gains and losses in mutual funds are gradual, shaped by months of strategy and market cycles. But history has seen moments so dramatic that billions in investor wealth evaporated in a single trading session, leaving fund managers red-faced and retail investors devastated.

This article examines how such staggering single-day losses happen, the infamous episodes that scarred the industry, and what lessons investors can draw from them.

How Can a Fund Manager Lose Billions in a Day?

1. Concentration Risk

   • Overexposure to a single sector or company means a sudden collapse drags the entire portfolio down.

2. Liquidity Crunch

   • In debt funds, one default can wipe out portfolio value in hours.

3. Redemption Stampede

   • Panic redemptions force funds to sell holdings at distressed prices, triggering sharp NAV crashes.

4. Market Shock Events

   • Sudden policy changes, court rulings, or global events (like 9/11, COVID crash, Brexit) can crush fund portfolios instantly.

5. Leverage and Derivatives

   • Funds using derivatives or leveraged bets can suffer outsized losses when trades move against them.

Case Studies of One-Day Billion-Dollar Losses

1. Franklin Templeton India Debt Funds (April 23, 2020)

• What Happened: Franklin announced the abrupt winding up of six debt schemes with assets worth ₹26,000 crore ($3.4 billion).

• The Trigger: Overexposure to illiquid, high-yield corporate bonds during the COVID-19 panic. Redemption pressure forced Franklin to freeze withdrawals.

• The Fallout: Overnight, investors saw their holdings locked and NAVs crushed. The fund house effectively “lost” billions in investor trust in a single day.

2. Long-Term Capital Management (LTCM), USA (1998)

• What Happened: A hedge fund run by Nobel laureates and top traders lost $4.6 billion in weeks, with billions wiped in single trading days.

• The Trigger: Russia’s debt default triggered leveraged derivative bets to implode.

• The Fallout: The U.S. Federal Reserve orchestrated a $3.6 billion bailout to prevent systemic collapse. For LTCM investors, wealth destruction was instant.

3. HDFC Mutual Fund & Yes Bank (March 2020)

• What Happened: Several Indian debt funds, including HDFC MF, marked down Yes Bank’s bonds to near zero after RBI’s rescue plan.

• The Trigger: Write-down of Additional Tier-1 (AT1) bonds worth ₹8,500 crore.

• The Fallout: Overnight, investors in these debt funds lost billions collectively. A single regulatory announcement erased wealth instantly.

4. US Money Market Funds – Lehman Brothers Default (2008)

• What Happened: The Reserve Primary Fund, a $62 billion money market fund, “broke the buck” after writing down Lehman debt.

• The Trigger: Lehman’s bankruptcy meant billions in short-term paper became worthless in one day.

• The Fallout: Investors rushed to withdraw, and the fund collapsed—marking the first money market fund failure in decades.

Why Do These Events Hit So Hard?

• Perception of Safety: Franklin debt funds, Yes Bank bonds, and U.S. money market funds were marketed as “safe.” Losses shocked investors.

• Speed of Collapse: Unlike equity bear markets that unfold over weeks, debt defaults or policy shocks can erase billions instantly.

• Information Asymmetry: Insiders often act faster, leaving retail investors blindsided.

• Systemic Impact: One fund’s crash often ripples across markets, amplifying panic.

The Human Face: Fund Managers in the Firing Line

When billions vanish in a day, the fund manager becomes the symbol of failure—even if macro conditions played a role.

• Accused of Mismanagement: Fund managers are blamed for reckless concentration or chasing yields.

• Loss of Reputation: Careers end overnight. Franklin’s star managers faced litigation and global scrutiny.

• Moral Responsibility: Even when rules were followed, investors expect prudence. Losing billions in a day feels like betrayal.

Lessons for Investors

1. No Fund Is Risk-Free
   Even debt and money market funds can lose big in a single day.

2. Watch Concentration
   Funds with outsized bets on a few issuers or sectors carry “sudden death” risk.

3. Understand Credit Risk
   High yields mean high danger. If returns look too good for “safe” products, beware.

4. Diversify Across AMCs and Categories
   Spread exposure across equity, debt, large-cap, and gilt funds to minimize shock losses.

5. Read the Fine Print
   Terms like “side pockets,” “credit risk,” and “AT1 bonds” matter more than glossy performance charts.

Ethical and Regulatory Questions

• Should regulators allow funds to market high-risk products as “safe”?

• Should AMCs bear some responsibility for misleading positioning of risky debt as secure?

• Should fund managers face personal liability when reckless bets wipe out billions?

The Franklin and Yes Bank cases showed regulators scrambling after the damage. Much like LTCM, oversight was reactive, not preventive.

Conclusion

The tale of the fund manager who “lost” billions in a single day is not about one individual—it’s about systemic fragility hidden behind the facade of stability. From Franklin Templeton in India to Lehman-linked money market funds in the U.S., history proves that sudden wealth destruction is possible even in regulated, “safe” funds.

For investors, the warning is clear: don’t mistake professional management for immunity against collapse. For regulators, the challenge is vigilance before—not after—the fall. And for fund managers, the responsibility is ethical clarity: protecting trust is as important as protecting assets.

Because in the end, billions can vanish in hours, but rebuilding investor faith takes decades.

ALSO READ: Was the 2020 COVID crash accelerated by deliberate panic selling?