LJM Fund Losses
What Went Wrong with LJM Preservation and Growth Fund (And What Investors Should Do Next)?
A Dark Day for Investors in the Misleading LJM Preservation and Growth Fund
Feb. 5th and 6th 2018 were dark days for investors in LJM Preservation and Growth Fund. The LJM Preservation and Growth Fund (LJMIX) plummeted over 80% (from a price of $10.34 to $1.94) in two days. See Figure 1. “It may be the biggest two-day drop for a mutual fund ever,” says Gretchen Rupp, a Morningstar analyst who is familiar with the fund. The fund itself, however, seems alarmingly calm about the plummet – their website remains largely unchanged and still proclaims that: “Investors commonly associate market volatility with instability and uncertainty. But volatility can be harnessed to target a return stream uncorrelated with the equity and fixed-income markets.”. LJM Fund’s messaging still seems to communicate that volatility should be harnessed to investors advantage through their fund.
The Problem with LJM Fund is about Messaging and Transparency
Nothing ‘preserved’ investors from the funds complete devastation, from which it is unlikely to recover. The cause of the collapse was fairly simple: LJM was betting against volatility through a strategy known as ‘shorting volatility’. Unfortunately, the volatility index (VIX) experienced one of the largest spikes in history which is what sent LJM spiraling. LJM wasn’t the only fund using this strategy, however, other ETF’s may have been more transparent about volatility shorting and are designed for short-term investors – not long term investors as LJM was. LJM was less than clear with investors about the nature of the investment strategy they would be utilizing. Nor were they transparent about the crash when it first happened as LJM apparently did not publish the fund’s net asset value on Monday (the day of the collapse), instead opting to wait until Tuesday at 3:40 pm to do so.
LJM has been disconcertingly quiet since the crash. However, Founder and Chairman of the fund, Anthony Caine, issued the following statement:
“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. 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. We will continue to keep everyone as informed as we are able throughout this difficult time.”
LJM Fund’s prospectus which states that the objective of the fund is “capital appreciation and capital preservation with low correlation to the broader U.S. equity market” appears to be in direct conflict with the investment strategies that were executed. Quite simply, the fund should never have been marketed to investors as a tool for capital “preservation”. That offense, combined with the fund’s haunting silence since the crash is likely to leave the unfortunate investors in the fund feeling hopeless. Retail investors may have legal recourse here.