U.S. Markets

Exclusive: LJM Partners shutting its doors after 'vol-mageddon' losses in U.S. stocks

(Reuters) - A Chicago-based fund manager that took risky bets on stock-market swings is shutting its doors after the strategy failed during the slump in U.S. equity markets in early February, according to a letter sent to investors on Wednesday.

LJM Partners Ltd, run by Anthony Caine, will be the first investment manager to close after complex trades failed spectacularly in the Feb. 5 reversal of fortune in U.S. stocks that some investors called “vol-mageddon.” LJM Partners and an affiliate saw losses of 80 percent or more.

The company, known in industry jargon as a “commodity trading adviser” or CTA, managed a series of strategies that attempted to effectively make money from the difference between how much the market moves and how much investors are willing to pay to insure against those price swings.

In normal markets, investors are willing to pay a premium for protection.

On Feb. 5, the Cboe Volatility Index .VIX, the most widely followed barometer of expected near-term volatility of the benchmark U.S. S&P 500 stock index .SPX, logged its largest single-day jump ever.

An affiliate of LJM Partners ran LJM Preservation and Growth Fund LJMAX.O, a mutual fund aimed at a retail audience which lost half its value on Feb. 5. The fund then lost much of its remaining value the day after as it unwound holdings at unfavorable prices to raise cash at the insistence of its broker, the company told investors in an earlier letter.

On Feb. 7, the affiliate closed the fund to new investment after losses totaling 80 percent. The fund will close altogether by March 29, according to a filing with the U.S. Securities and Exchange Commission this week.

The affiliate-managed mutual fund held assets worth $812 million at the beginning of the month but that has shriveled to $14 million.

LJM Partners, which reported managing $547 million as of January, decided “to not resume trading and liquidate all remaining investor capital,” the company said in the letter on Wednesday. “We are deeply saddened by this decision and are thankful for the many years that we had the opportunity to manage the LJM strategies.”

LJM had been one of a handful of fund companies that found success selling relatively complex and high-fee funds to investors hoping to cut risk and boost returns.

Demand for such products has persisted even as the investment management industry’s profits are being hollowed out by a move to use lower-cost funds, some which simply track an index.

The LJM mutual 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.

In letters to clients this month, Caine, a veteran of the 1990s technology boom who later went into finance, said he had planned to resume investing despite the losses. The Preservation and Growth Fund was also run by Anish Parvataneni, a former trader for the well known fund investor Ken Griffin of Citadel.

“Volatility and options markets experienced an extreme outlier event,” Caine said in one of the letters. “Monday’s losses were so severe because as volatility spiked exponentially in the afternoon, the illiquidity in the markets severely limited LJM’s ability to reduce risk.”

Phone calls to LJM have not been returned. A Reuters reporter who visited their headquarters recently was escorted out by LJM’s chief compliance officer, Katy McBride, who declined to answer questions.

Caine’s next challenge may be in court.

Investors are suing him and Parvataneni over what they said were inadequate disclosures. The fund touted its ability “to deliver solid returns while maintaining risk parameters” in its most recent annual report to shareholders.

Reporting by Trevor Hunnicutt in New York; Additional reporting by Saqib Iqbal Ahmed in New York and Richa Naidu in Chicago; Editing by Jennifer Ablan and Clive McKeef