How I Lost Money in LJM P&G Fund

February 6, 2018 is a day that I will remember for the rest of my life. I had investments in the LJM Preservation and Growth fund. This mutual fund totaled more than $770 million at its peak. On February 5, the share price dropped a full 55% from $9.67 a share to $4.27. The fund failed to report this loss, so none of the investors were aware. The next day, the fund dropped from $4.27 to $1.94 per share, another 54% drop, and a full 80% decline in just two days. I was devastated. Some analysts believe it to be the most dramatic two-day decline of any mutual fund ever.

Well, how could this have happened? On website, you’ll see some photos of someone hiking up snow-capped mountains. The website has an online brochure with the tagline “make volatility your asset.” It goes on to claim “investors commonly associate market volatility with uncertainty. But volatility can be harnessed to target a return stream uncorrelated with the equity and fixed-income markets.”

As is with actual mountain climbing, the reality of the situation was much more treacherous than advertised. This fund worked by selling naked put options on S&P 500 futures. Its borrowing levels were well about the average margin, and it was leveraged. Put options are essentially a contract that makes it possible for buyers to sell their securities at an agreed upon price. This is going to be the price they’re purchasing at. Buyers can then basically hedge an entire position or a portfolio or funds. In the worst case scenario where the price of the option falls below the strike price, at least the buyer can make some money on the options. When a lender writes put options to buyers, the lender is making a bet that the price will remain higher than the option’s price. When sellers do not own the securities of which it is writing options, this is known as naked option writing. This sort of writing comes with almost unlimited downside risk potential.

S&P 500 option prices are partly dependent upon market volatility. So by investing in LJM Preservation and Growth, my money was in a fund that was betting the market would remain stable. This is known among fund managers as shorting volatility. Unfortunately, the volatility index spiked severely in those days. It more than doubled, going from 17 to 37 on its index. This is what caused LJM P&G to fail. It was a gamble that proved disastrous.

This fund was managed incredibly poorly, to say the least. The fund managers operated with utmost negligence towards the wellbeing of its investors. Luckily, there are LJM Capital Preservation and Growth Fund lawyers that work to recover losses made from this fund. If you lost money by investing in this fund, you may be able to recover all or part of them by contacting the attorneys at Erez Law.

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