Hedge Fund Suffers Major Losses Due to Volatility Trade


Hedge Fund Suffers Major Losses Due to Volatility Trade

Shortly after the market opened on Tuesday, clients of LJM Partners got the news that the LJM strategies has suffered substantially due to sharp rise in volatility.

The Chicago-based hedge fund that has a half a billion dollar in assets, directed the damage towards the increasing volatility. In the last few trading days, volatility trade has claimed more than one scalp. LJP Partners’ mutual fund called the LJM Preservation and Growth Fund collapsed by 82% over the last week. It was closed to a new capital on Wednesday.

According to investors of the market LJP is among the most renowned funds to fall prey to the popular ‘short vol trade’. For many hedge funds, the trade has become beneficial including LJM and their Preservation and Growth funds reported positive returns every year except the one when it was launched in 2006 as per the fund documents.

After the CBOE Volatily Index more than doubled to the highest level in six and a half years on Tuesday, the risk increased. The move resulted in an exchange-traded note called the VelocityShares Daily Inverse VIX to collapse on Monday in the after-hours trading. It was betting on a continued calm situation in the market.

LJM’s Founder and Chairman Tony Caine said in a client’s note on Tuesday that portfolio management has been circumventing with as many futures as possible in order to insulate the portfolios to suffer from further losses. He said that their ability to do so successful relies on liquidity and market conditions and their goal is to preserve as much capital they possibly can.

On last Friday, the firm also sent a note elaborating the particular aspects of their portfolio that had caused losses in January before the market devastation of last well. Even then the fluctuations and rises in the volatility during January caused losses in each of the firm’s three strategies.

According to the note written to the clients, the rapidly increasing market when paired with volatility of such magnitude does not happen often and is therefore quite challenging to the LJM strategy.