When it rains it pours. A portfolio manager that saw its only fund lose over 80% of its value during the stock market sell-off last week is now facing a possible lawsuit over how it ran the strategy and what it told investors.
The LJM Preservation & Growth fund (LJMIX) hit headlines last week after it fell over 50% twice in two days, taking year-to-date losses to -82%, after its volatility strategy backfired dramatically when the Cboe Volatility Index (VIX) spiked.
Managed by Anish Parvataneni and Anthony Caine, the LJM Preservation & Growth fund 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.
Having stayed stubbornly low for over two years, volatility made a dramatic comeback last week. The Cboe Volatility index (VIX) spiked at almost 50 early Tuesday morning, before dropping to finish the day at around 37. Over Wednesday it retreated to end the day at 25, on Thursday it peaked at almost 36, before dropping on Friday from a high of 39 to end the week at around 30.
The firm announced on Wednesday last week that it was closing the fund to new investors, and this week Citywire reported it had written to investors to say all open positions in the fund have been liquidated. The fund itself has not been liquidated.
Lawyers are now lining up to sue the firm over the way the strategy was run and the firm’s communication in the wake of its losses.
On Friday February 9, a complaint was filed in US District Court in Chicago by Leonard Sokolow, an investor in the fund, who charged LJM Partners, its executives, and other related parties with violating federal securities laws.
According to court documents, the claim is seeking class action status and alleges the firm reported ‘false and misleading’ statements in its registration statements and prospectuses, which state: ‘The fund aims to preserve capital, particularly in down markets (including major market drawdowns), through using put option spreads as a form of mitigation risk.’
The claim says: ‘In truth, however, LJMIX was not focused on capital preservation and left investors exposed to an unacceptably high risk of catastrophic losses.’
Listed defendants in the complaint include the fund's parent company, LJM Funds Management, Ltd., Two Roads Shared Trust, and Two Roads Shared Trust’s underwriter, Northern Lights Distributors, LLC.
Various individuals serving as officers for Two Roads Shared Trust were included in the claim in addition to LJM portfolio managers Parvataneni and Caine.
Two Roads Shared Trust is a pooled mutual fund distribution vehicle, which is designed to help hedge fund managers launch mutual funds. It in turn uses the services of fund administrator Gemini Fund Services and legal counsel Dechert LLP, neither of which are named as part of the possible lawsuit.
Sokolow's claim also accuses LJM Partners of being in violation of federal securities laws ‘by failing to disclose the fact that LJMIX had not taken appropriate steps to preserve capital in down markets and left investors exposed to an unacceptably high risk of catastrophic losses.’
According to Morningstar, LJM failed to disclose the fund’s net asset value on Monday February 5 and delayed until the close of trading on Tuesday February 6, before making its 56% loss public.
In a report published on Friday, Morningstar analyst, Gretchen Rupp revealed LJM continued to accept new assets during the day on Tuesday even while the prior-day’s NAV was not published and the fund went on to declare a second 56% decline.
‘These catastrophic losses, poor administrative controls, and weak fund-holder communications are unprecedented in the industry’, she wrote.
In the complaint, Sokolow and any other investors who join the class-action lawsuit, are seeking compensation ‘for all damages suffered in connection with their purchases of LJMIX.’
The Preservation & Growth fund had $805 million in assets under management across all share classes at the end of January, according to Morningstar.
Sokolow is represented by Freed Kanner London & Millen, Criden & Love, P.A, and Scott+Scott Attorneys at Law. All three law firms, plus a number of others, have put out calls to investors who sustained losses from their holdings in LJMIX.
One of those law firms is Hagens Berman Sobol Shapiro, LLP, a class-action litigation firm based in New York City.
Reed Kathrein, a partner at the firm, told Citywire, he had spoken to a number of investors.
'The type of people in here didn’t think they were taking on this kind of risk,' he said. 'People are stunned.'
As of February 12, Sokolow remains the only plaintiff that has filed a formal complaint.
LJM did not return requests for comment at the time of the publication.