"Make Volatility Your Asset", Until You Get A Letter Like This

Yesterday, we introduced readers to the $550 Million LJM Partners: a Chicago-based vol-selling fund, which we learned late on Tuesday had lost over half of its NAV some time on Monday, following the biggest VIX spike in history.

This was a disappointing development to investors in its most popular, LJM Moderately Aggressive Strategy which until last week had AUM of $366MM, and had significantly outperformed the market since inception.

And, as we warned on numerous occasions, just like XIV, this particular vol-selling strategy was set for an abrupt crash.

This was revealed in the company"s letter to clients, in which founder and chairman Tony Caine had this to say to clients. Note: any letter whose first paragraph ends in "we have suffered significant losses", can not be good.

As many of you may be aware, the market losses and volatility spike on Monday, February 5th were unprecedented. The VIX Index spiked 20 points, from 17.3 to 37.3, and was the largest one-day spike in the Index’s history. LJM strategies have suffered significant losses.  

 

At this time, the portfolio management team is trying to hedge with as many futures as possible to attempt to insulate portfolios from further losses.

The letter concluded hopefully:

"Our plan is to go to a defensive position depending on liquidity of options markets. Our goal is to preserve as much capital as possible. Our ability to do so depends on market conditions and liquidity."

LJM"s full letter below:

Fast forward another day, when we can safely say that LJM"s plan to "to go a defensive position" was met with disaster, because as the latest NAV update shows, two days after the VIXplosion, the fund has lost 80% of its "assets" in just two days, assuming one wants to call volatility an asset which ironically LJM did considering its motto is "make volatility your asset." And to think they all along they meant liability.

Finally, those curious what was going through the head of the LJM "strategist" whose only trade "idea" was to short vol, he answers in the interview below:

CTA PROFILE - Anish Parvataneni from John Lothian Productions on Vimeo.