Chicago-based LJM suspends trading, closes fund

Reuters is reporting that Chicago-based commodity trading advisors and fund manager LJM Partners Ltd, is closing its doors after experiencing massive losses following the extreme sell-off in equity markets in early February.

LJM runs several different programs but their core strategy is option writing. They are generally short volatility and where so when volatility as measured by the CBOE Volatility Index (VIX) spiked on Feb. 5.

LJM managed $464 million in three strategies: LJM Aggressive Strategy, LJM Moderately Aggressive Strategy and LJM Preservation and Growth Strategy, through January according to its website.

An affiliate of LJM Partners ran mutual fund LJM Preservation and Growth Fund (LJMAX.O), which lost half its value on Feb. 5 according to Reuters. The fund then lost much of its remaining value the day after as it unwound holdings at unfavorable prices. Reuters reports that the fund, which held assets of $812 million at the beginning of the month and dwindled by more than 80%, will close by March 29, according to a filing with the U.S. Securities and Exchange Commission this week.

Numerous industry insiders as well as Reuters have pegged losses in certain LJM programs at 80% or more.

The Preservation and Growth Fund was run by Anish Parvataneni, a former trader for Ken Griffin of Citadel. Reuters reports that investors are suing LJM Founder Anthony Caine Parvataneni over what they said were inadequate disclosures.

Anthony Caine posted the following letter on LJMs website following the event:

Dear LJM Clients, I know that this is a difficult time and you have a lot of questions. We’ve prepared a timeline of events below to help explain what transpired in the markets and the actions we took in response.

On Monday, February 5, volatility and options markets experienced an extreme outlier event. The movement in the VIX Index, a proxy for implied volatility, reached record levels. The aggregate move of 20 points in VIX on Monday was the greatest in VIX history. While the LJM Strategies do hold long options to help mitigate risk, the extreme VIX movements resulted in settlement option prices that caused the significant losses on Monday.

As implied volatility began to rise throughout Monday morning, LJM’s portfolio management team adjusted the portfolios to maintain and mitigate risk exposure. In the late afternoon, the VIX spiked approximately 10 points in less than an hour and the markets became illiquid. 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.

Overnight on Monday, the VIX rose even higher to 50, further increasing portfolio risk. On Tuesday morning February 6, LJM received notification from its largest FCM to promptly close out or transfer all open positions.

The markets still had limited liquidity on Tuesday, February 6. Throughout the day, LJM attempted to exit open positions under the FCM’s direct monitoring in LJM’s offices to reduce risk and close positions. LJM, working with the FCM risk team and the portfolio management team, agreed that liquidation across all client accounts, regardless of clearing broker, was the most prudent action given market volatility and portfolio risks.

Reducing risk and exposure were LJM’s primary goals, and LJM was forced to execute trades at less favorable prices than would have existed on a normal business day because of the sudden and substantial lack of market liquidity. The liquidation of open positions on Tuesday, February 6 caused additional substantial losses from Monday’s closing prices.

All open positions are liquidated and the accounts are holding remaining cash balances.

LJM went to a defensive position on Tuesday, by exiting open positions, but intends to resume operations. Additional notice will be provided to all clients prior to re-engaging trading, and any requested redemptions will be processed prior to re-engagement.