When the shit hits the fan

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Sorry, I had never heard of the LJM Preservation & Growth Fund before this. What is the big deal about this fund? Well, it fell 80% last week. The fund says it tries to profit from the difference between realized and implied volatility. This is one example of an options fund blowing up but it is unlikely to be the only one that experienced similar problems. My partner has found another one which has lost more than 90%. Investors were wiped out.

 
Wall Street has gone nowhere but up since 2010. Volatility has scraped along the bottom that entire time. With volatility so low for so long these kinds of funds would have had large positions, but when volatility finally broke out on Monday, they incurred huge losses which forced them to cover quickly, selling potentially hundreds of billions of dollars in equities.

 
Barron’s has an interesting story on this blowing up. Here is a part of the article: For investors in the LJM Preservation and Growth fund, Monday, Feb. 5, 2018, is a date that will live in infamy. The $772 million alternative mutual fund’s share price plummeted from $9.67 to $4.27, a 55.8% decline. To make matters worse, the fund (ticker: LJMAX) did not report the loss until late the following day, so shareholders were in the dark as to what happened. And then the fund suffered another, 54.6% fall to $1.94 a share on Feb. 6, a two-day total decline of 80%. “It may be the biggest two-day drop for a mutual fund ever,” says Gretchen Rupp, a Morningstar analyst who covers the fund.

You can read the full article HERE.

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