The ratio works fine if the market trades down in a linear fashion over time. Sudden drops and ratios are not only useless but generate massive losses and sharp increases in margin.
LJM Preservation and Growth Fund, collapsed by 82 percent! (WTF?)
- Thread starter prc117f
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The ratio works fine if the market trades down in a linear fashion over time. Sudden drops and ratios are not only useless but generate massive losses and sharp increases in margin.
I do not think that anybody here would argue that similar events haven't occurred before.
It would also appear that LJM was as leveraged in 2008 as in 2018. It would need to be in order to profit from the tiny option premium offered by OTM options.
Also, if you look at the LJM profit chart I posted you will see that they survived 2008, 2010, 2011, 2015 with hardly a dent in their equity curve (and were even able to take advantage of the inflated option values to help compensate for the initial loss they had to incur right after the vol events).
However, this time did seem to be different as their usual hedges did not kick in as they did in those years. I am trying to figure out exactly why.
Which is why I am wondering why they apparently chose this approach...
In 2008 they lost 67% in their aggressive fund. They almost blew out. They issued a large apology to their investors after that and swore it would never happen again. It was after 2008 that they started buying options in all 3 of their funds to prevent such an event from happening again. Obviously they did something batshit crazy in this "preservation" fund this time around. As you posted, that particular fund was showing much less variance.
It will all come out in court. Everyone is suing the shit out of them. I'm sure we will get a very detailed explanation of what happened.
Right. But it's the right thing to do and would have gained them enormous credibility had they done so and survived.
In hindsight of course they should. But what if the world remained quiet for another 6 months? Then they would look lazy. The vix being overly crowded was very well known in the vol community. But their mandate was to sell vol. they really had no choice and the tsunami of vol covering took them out.
To be fair this particular nuance where 30 day vol is up over 100% close to close had never happened before.
And virtually nothing else has happened in any other risk class.
I'm pretty sure their mandate was to harvest the vol risk premium while not going out of business. Dual mandate, so to speak...
