This Is Not The Number Your Hedge Fund Wants To Show

One day after the February 5 volocaust, the first real casualty of the record VIX surge emerged, when the Chicago-based vol-selling fund, LJM Partners, unpleasantly surprised its investors that it was down more than 50% in one day, a loss which has since ballooned to roughly 80%.

Since then, however, while many hedge funds emerged exhibiting material losses, none had what appeared to be a terminal wound.

Until today, because while until now it had managed to sneak through the cracks, in its latest monthly update, the so-called 1.2 Fund reported a number that no hedge fund would ever want to show to its LPs: after nearly 10 years of stable, if modest, growth, the fund which “invests in short and long option strategies on the S&P 500 futures index” reported an apocalyptic -60.11% collapse for the month of February, the direct result of the February 5 VIXplosion.

And this is how you go from being up 91% since inception to -24%. And yes, the annualized volatility cell is intentionally left blank.

The only thing that diffuses the otherwise tragic situation – for 1.2 Fund investors that is – is the sheer comedy that effuses from the Fund’s “strategy” page, highlights ours:

The strategy of The 1.2 Fund is to invest in short and long option strategies on the S&P 500 futures index, employing an active management to market exposure and risk. The fund mainly trades front month expiry and aims to hold a balanced exposure to upside and downside market movements. The fund further employs the use of futures and can buy outright puts and put and call spreads to act as insurance to minimise the potential draw down from extreme market movements to both the downside and upside.

The 1.2 Fund aims to achieve steady monthly returns based on a low volatility model; the choice of the monthly target is flexible and depends on market conditions and the level of volatility as indicated by the Vix. The flexibility of the strategy allows the managers to liquidate the portfolio and/or remain flat also during the expiry whenever the market conditions dictate it as the priority of the managers is always to minimise risk versus returns.

The strategy is dynamic and evolves throughout the expiry as market conditions change. The managers aim to minimise market exposure and seek to generate profit via market movements. The strategy implemented by the investment managers creates returns by exploiting volatility and by the natural time decay process exhibited by options every month. The portfolio is constantly monitored in real time and modelled under differing market conditions in order to determine if positions need to be adjusted.

We aim to achieve return via a disciplined, staged process, combining top down macro analysis of the global economy with technical analysis and strict risk management designed to help protect the fund against any unexpected downside or upside risk.

Of course, it all worked… until it didn’t. Oh, and for those wondering why the fund is called 1.2, here is the answer:

The fund generates returns via option positions on the S&P 500 Futures Index. Exposure to the index is gained through a range of structures utilising both long and short positions seeking to achieve a monthly return of 1.2% net of fees.

To be sure, The 1.2 Fund sure sounds better than The -60% Fund.

h/t Charlie