The LJM Preservation & Growth fund has closed to investors after it fell more than 50% for a second day in a row.
The fund fell 56% on Monday and then a further 55% on Tuesday, taking year-to-date losses to -82%, after its volatility strategy backfired dramatically when the Cboe Volatility Index (VIX) spiked.
Having stayed stubbornly low for over two years, volatility returned to the market this week. The VIX spiked at almost 50 early Tuesday morning, before dropping off to finish the day at around 37. Over Wednesday it retreated to end the day at 25, before rising 23.9% today to around 34.
In a tweet on February 8, Jeffrey Ptak, global director of manager research at Morningstar, said the magnitude of the LJM fund’s fall appeared to be ‘in a league of its own’ and that it’s one-week loss of 80% was one of the largest recorded in the firm’s funds database, which goes back to 1988.
Managed by Anish Parvataneni and Anthony Caine, the LJM Preservation & Growth invests in ‘long and short options on the S&P 500 Index futures that seek to profit, primarily, from the volatility premium—the spread between implied and realized volatility,’ according to the firm’s website.
The strategy was introduced in 2006 and launched as a mutual fund in January 2013.
Founded in 1998, Chicago-based LJM specializes in managing volatility strategies.
The firm announced Wednesday it was closing its only mutual fund to new investors, an ominous sign that Rupp believe is a precursor to its liquidation.
Documents filed with the Securities and Exchange Commission on February 7, read: ‘The LJM Preservation and Growth fund is closed to all new investments, with the exception of dividend reinvestments, and the fund's transfer agent will not accept orders for purchases of additional shares of the fund, either from current fund shareholders or from new investors.’
The document also said the fund would not impose any redemption fee on investors.
While the market’s sell-off resulted in broad-based losses for many volatility strategies, the LJM fund’s fall is by the far worst.
Within Morningstar’s Options Based category, the year-to-date total returns for the LJM Preservation & Growth fund, -82%, put it last by some distance.
The next biggest faller in the category was the AlphaCentric Hedged Market Opportunity fund, which is down -15.6% so far this year.
Morningstar analyst Gretchen Rupp, who sits in the firm’s multi-asset and alternatives team, said: ‘This fund [LJM Preservation & Growth] was one of the riskiest strategies in its category. There are more conservative strategies with protective collars where there is less inherent risk and more predictable returns.’
Prior to 2018, the fund experienced a positive calendar year performance in 2017, outpacing the average fund in its Morningstar category by 38 basis points.
For three-year total returns to the end of 2017, the fund is ranked third out of 65 funds in the Citywire Global Macro category, and was up 39.1% over that period, versus the average fund’s 8.4%.
The calm that pervaded markets in 2017 led to a rise in popularity for strategies that profited from betting against a spike in volatility and LJM was no exception.
Net inflows for the LJM Preservation & Growth fund were positive in every month of the year, according to Lipper data.
Rupp said the fund had disclosed a loss of 1.52% for Wednesday and predicted that it would likley now liquidate what assets remained.
'Our assumption is that it will be liquidating, we just don’t know what’s left at this point,’ she said.
No one from LJM returned requests for comment at the time of publication.