The LJM Preservation and Growth fund, which fell more than 80% in a week during February’s sell-off, is set to be liquidated amid the growing threat of legal action from investors left nursing significant losses.
The fund’s managers have filed documents with the Securities and Exchange Commission, outlining plans to dissolve the fund effective March 29, 2018.
The liquidation marks the end for a fund that hit headlines in early February when it dropped 50% twice in two days, declines that erased 82% of the fund’s value, after its volatility strategy backfired dramatically when the Cboe Volatility Index (VIX) spiked.
Managed by Anish Parvataneni and Anthony Caine of LJM Partners, the LJM Preservation and Growth fund invested 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.
Following its dramatic collapse, LJM Partners announced on February 7 that it would be closed to new investments. Not long after, in a letter dated February 9, LJM informed investors that it would be liquidating open positions and holding only cash. The fund itself was not initially liquidated.
The strategy was introduced in 2006 and launched as a mutual fund in January 2013. It had $805 million in assets under management across all share classes at the end of January, according to the Morningstar website. This has since to fallen to $13.8 million.
Despite now filing to liquidate the fund, it would appear LJM has not waived its 2.24% management fee. When they closed the fund, the managers said they would not impose a redemption fee for current investors but did not remove the management fee despite moving to hold cash. This would still appear to be the case.
A spokesperson for LJM could not be reached for comment at the time of publication.
While the liquidation marks the end of the fund, the trouble for its managers may only just be beginning.
LJM, Parvataneni and Caine already faced one potential class action lawsuit, after Leonard Sokolow, an investor in the fund, filed a complaint on February 9 in the US District Court in Chicago, alleging LJM Partners, its executives, and other related parties violated federal securities laws.
A second investor has now initiated proceedings.
On February 21 Stanley Bennett filed a nearly identical complaint, also seeking class action status. The complaint seeks compensation ‘for all damages suffered [by investors] in connection with their purchases of LJMIX’.
Bennett, who invested $90,000 in the fund in November last year has seen his stake plummet to just $15,673.
Lawyers for Bennett could not be reached at the time of publication.
LJM was not the only firm that saw its bet on volatility backfire.
The ProShares Short VIX Short-Term Futures ETF (SVXY) plunged 88% and halted trading after the dramatic spike in the VIX on February 5.
Unlike the LJM fund though the ProShares ETF weathered the storm and actually took in $500 million later that week, according to Bloomberg, as traders eyed a quick rebound.
Still, ProShares, the firm behind the ETF and the ProShares Ultra VIX Short-Term Futures ETF (UVXY), has moved to reduce the leverage on the ETFs and amend their investment objectives accordingly.
The SVXY, which bet against a rise in volatility, will now seek to return -0.5x the inverse of the S&P 500 VIX Short-Term Futures index versus the previous -1x objective. The UVXY will now seek to return 1.5x the same index versus the prior objective to return twice the index.