NEW YORK ( TheStreet) -- Dave Kavanagh, a 30-year veteran in the futures and fixed income markets, thought he had learned his lesson about due diligence, having already witnessed fraud firsthand at Refco in October 2005. While the funds were safely transferred through the bankruptcy process, Kavanagh, who now runs the Grant Park Managed Futures Strategy Fund ( GPFCX), decided it was best to move money to a diverse number of Futures Commission Merchants (FCMs) and commodity brokers to avoid being trapped in the event of another bankruptcy. Ironically, one of the dealers he chose was MF Global ( MFGLQ.PK). When MF Global revealed its huge loss in the third quarter and the size of its European exposure, Kavanagh automatically grew concerned and began the process of shifting money, opening accounts with three other commodity brokers. But he didn't have time to get all his money out before the firm filed for bankruptcy. Now his fund has $14 million in assets still stuck at MF Global and is struggling to recover the money from a bankruptcy process that has been further complicated by an investigation into missing client money. "I thought as long as your money was in segregated funds everything was good and safe," he said. "Now we know it was not safe." More than 150,000 customer accounts worth about $5.45 billion were frozen on Oct.31, when MF Global filed for bankruptcy and a "shortfall" of $633 million in customer funds was discovered. That estimate has now been doubled to $1.2 billion. Accounts with open trade positions were moved with 60% of the collateral. Not all of the money could be transferred because of the ongoing investigation into the missing money. Clients have been subject to margin calls, even as their money is still frozen. And it is not just renegade speculators who have been affected. Legitimate hedgers in the agri-business from farmers to grain elevators have been hurt too.
"We are caught in between twilight zone and a nightmare," says Kavanagh. "You can't get out your assets. For three weeks we were told that 11% of the customer accounts are missing. Then magically that number doubles."