As recently reported, investors in the LJM Preservation and Growth Fund (the “Fund”) (LJMAX, LJMCX, LJMIX) sustained considerable losses in early February, 2018, due to the Fund’s risky underlying strategy premised on capturing income from options in a low-volatility market. Following the Fund’s two-day decline of approximately 80% in trading on February 5th and 6th, one Morningstar analyst stated: “It may be the biggest two-day drop for a mutual fund ever.”
Many investors have reportedly bought into LJM Preservation and Growth Fund on the recommendation of an investment advisor who, in turn, employed supposed third-party tactical mutual fund allocation through a “sleeves” strategy. The “sleeves” strategy has reportedly been espoused by Horter Investment Management (“Horter”) and marketed to approximately 250 investment advisor representatives. About 210 RIA firms have reportedly established relationships with Horter. Headquartered in Cincinnati, OH, Horter is a SEC Registered Investment Adviser (“RIA”) formed in 1991 with a stated goal of “risk mitigation, capital preservation and minimizing drawdowns so that people don’t get hurt with severe corrections or a bear market.” Horter reportedly offers services as a third-party advisor to other investment advisers
One fund reportedly utilized by Horter as part of its tactical mutual fund allocation strategy was LJM Preservation and Growth Fund. Headquartered in Chicago, IL, the Fund was founded in 2012, as an affiliate of LJM Partners, an investment management firm that has been managing alternative investment strategies since 1998. Since its 2013 inception, the Fund has purportedly employed an investment strategy that: “seeks capital appreciation and capital preservation with low correlation to the broader U.S. equity market. The Fund attempts to profit, primarily, from the volatility premium – the spread between implied volatility (investors’ forecast of market volatility reflected in options pricing) and realized (actual) volatility. The Fund aims to capture this premium by writing (selling) call and put options on S&P 500 Index futures.”
A put option is a contract that allows the purchaser to sell a security at a specified price (the strike price) at a predetermined future date (expiry). This allows the purchaser to hedge a position or a portfolio, by essentially creating a price floor, where a drop in a security price below a certain level will mitigate against further downside exposure, as well as deliver income on the option contract. However, in instances when an investor, or institutional fund manager, sells a put option — the seller is betting that the price will stay higher than the option price. More importantly, in instances when the seller of the option contract does not own the underlying security, then the seller is engaged in naked option writing. Such a strategy amounts to an extremely risky bet on volatility. In fact, some market pundits have referred to selling naked puts as “picking up nickels in front of a steamroller.”
Registered investment advisers owe a fiduciary duty to investors. Accordingly, investment advisers’ duty to investors includes conducting due diligence on any investment prior to its selection as part of a recommended investment strategy. Investors who sustained losses as a result of recommendations or investment management that did not live up to these standards may be able to recover their losses in private arbitration or through litigation.
Investors with questions about a possible claim concerning a financial advisor or Registered Investment Adviser may contact Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or firstname.lastname@example.org for a no-cost, confidential consultation.