U.S. Markets

Investor files lawsuit over U.S. LJM fund that lost most of its value

NEW YORK (Reuters) - An investor on Friday filed a lawsuit against managers of a U.S. mutual fund that relied heavily on a strategy that profits from calm markets but lost four-fifths of its value in turmoil this week.

In a complaint seeking class-action status filed in U.S. District Court in Chicago, investor Leonard Sokolow said he owned shares of LJM Preservation and Growth Fund, a once-$800 million fund that lost most of its value despite touting its ability “to deliver solid returns while maintaining risk parameters” in its most recent annual report to shareholders.

“In truth, however, [the fund] was not focused on capital preservation and left investors exposed to an unacceptably high risk of catastrophic losses,” the complaint said.

A spokesman for Chicago-based LJM Partners Inc, parent of the fund’s operating unit, could not be reached.

The LJM fund appeared to be the latest casualty in a series of spectacular blow-ups of investment strategies that effectively bet on low or falling volatility.

Investors hungry for greater returns piled into options, futures, swaps and exchange-traded products that made such bets, in some cases earning triple-digit annual returns in recent years.

Credit Suisse said on Tuesday it would terminate the second-largest publicly traded product betting on future swings in the S&P 500 after its value plunged nearly 93 percent in one day during the global market rout.

LJM Preservation and Growth Fund had been run by Anthony Caine, a veteran of the 1990s technology boom who later founded LJM, and Anish Parvataneni, a former trader for well-known investor Ken Griffin’s Citadel.

In an environment that has been tough on high-cost fund managers, the LJM fund took in $393 million in new cash from investors in 2017, its best sales since launching in 2013, according to the Lipper unit of Thomson Reuters, despite fees as high as 3.34 percent a year.

LJM closed the fund to new investment this week, a filing with the U.S. Securities and Exchange Commission showed.

Reporting by Trevor Hunnicutt; Editing by Leslie Adler and Matthew Lewis