Another Fund Implodes After Volatility Blows Up

This is probably the biggest fund to date closing down due to retarded risk management, post volatility explosion. LJM Partners suffered a gut wrenching 82% decline over the past week and closed the fund on Wednesday.

The email header to clients was: “LJM strategies have suffered significant losses”

Fuck that had to hurt.

LJM is a Chicago based firm who had ~$500 million in assets.

Investors in the industry are calling LJM among the most prominent funds to fall victim to the popular “short vol trade.” The trade had become profitable for many hedge funds, including LJM, whose “Preservation and Growth” fund posted positive returns every year except one since it launched in 2006, according to fund documents.

But the risk amplified this week after the CBOE Volatility Index, or VIX, more than doubled on Tuesday to the highest levels in six and a half years. The move caused an exchange-traded note called the VelocityShares Daily Inverse VIX, which was betting on continued calmness in the markets, to collapse in after-hours trading on Monday. Subsequently, Credit Suisse, which issued and managed the ETN announced that it would ultimately be liquidated. ProShares Short VIX Short-Term Futures also suffered massive declines after volatility spiked.

“Short volatility strategies, selling options and collecting premium, have been critically described as picking up dimes in front of a steamroller,” wrote Don Steinbrugge, the founder and CEO of Agecroft Partners, a hedge-fund consulting firm, in a blog post. “They generate very good risk adjusted returns until volatility spikes and then have the potential to lose most of their assets if not properly hedged.”

Tuesday’s client note, signed by LJM’s Founder and Chairman Tony Caine, said that the portfolio management team has been hedging “with as many futures as possible to attempt to insulate portfolios from further losses.” He caveated that their “ability to do so depends on market conditions and liquidity.”

“Our goal is to preserve as much capital as possible,” he said.

How’d that work out?