The manager of a volatility fund that fell over 80% last week has liquidated all open positions in the strategy, which now sits in cash.
The LJM Preservation & Growth fund 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.
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.
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.
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.
The firm announced on Wednesday last week that it was closing the fund to new investors, and it has now written to investors to say all open positions in the fund have been liquidated. The fund itself has not been liquidated.
In a letter dated February 9, posted on the firm’s website, Caine said: ‘As of the date of this letter, all open positions in the fund have been liquidated and the fund only holds cash.’
‘LJM Funds remains committed to its clients and we sincerely appreciate your patience during this difficult time.’
You can read the full letter here.
In it Caine explains that one reason the fund fell so sharply at the start of last week was the illiquidity of the volatility and options markets.
‘Monday’s losses were so severe because as volatility spiked exponentially in the afternoon, market illiquidity severely limited LJM Funds’ ability to reduce risk,’ he wrote.
'Overnight on Monday, the VIX rose even higher to 50, further increasing portfolio risk. On Tuesday morning, February 6, LJM Funds received notification from its futures commission merchant (FCM) to promptly close out of or transfer all open positions. Volatility and options markets still had limited liquidity on Tuesday.
'Throughout the day, LJM Funds attempted to exit open positions under the FCM’s direct monitoring in LJM Funds’ offices to reduce risk and close positions. Reducing risk and exposure were LJM Funds’ primary goals, and we had to execute trades at less favorable prices than would have existed on a normal business day because of the sudden and substantial lack of market liquidity.'
Prior to 2018, the fund experienced 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.
A spokeperson at LJM could not be reached for comment at the time of publication.