What is this option selling hedge fund's edge??

[short&naked]

Here is a hedge fund that sells saddles on the S&P 500 and has done fairly well. The manager even states in an interview with Active Trader Magazine that he believes the market to be efficiently priced.

http://ljmpartners.com/english/history.php


If so, what if anything is his edge? (positive expectancy) Does he just sell naked and hope that a tail event does not blow him up. Or does he simply rely on his discretion and experience to roll and adjust his positions.

 

[ForexForex]

I don't see how they made 38.20% in 2010 just be selling S&P 500 straddles. Take a look at the 1 year chart, it did not trade flat.

http://finance.yahoo.com/echarts?s=^GSPC+Interactive#symbol=^GSPC;range=1y

 

[nazzdack]

Quote from short&naked:
----hedge fund....has done fairly well.
----what if anything is his edge?
----hope that a tail event does not blow him up.
----rely on his discretion and experience....

1) They almost imploded in the Fall of 2008. Many funds would be liquidated after something like that. It had killer drawdowns in August-1998 (LTCM Meltdown), September-2001 (9-11) and July-2002 (Tech Wreck).
2) The fund did "poorly" from 2000-2002, a strongly trending bear market.
3) The fund's performance is indicative of premium-selling and being in a race against time before large losses occur.

 

[cvds16]

the agressive strategy is a joke, have you looked at the maximum drawdown ? 63.8% that's pure kamikaze

 

[jamesbp]

The edge is using other people's money .... participate in the upside with 2/20 fees .... lose nothing but opportunity on the downside ... liquidate fund .... rinse and repeat ....

 

[short&naked]

Is there any option writing HF out there that does not use a kamikaze strategy?

 

[EliteThink]

the real problem is that LJM, as well as ACE, tried to make up small losses by doubling and tripling down. The root cause is premium sellers becoming complacent and accustomed to winning, losing sight of risk management.

 

[newwurldmn]

Quote from jamesbp:

The edge is using other people's money .... participate in the upside with 2/20 fees .... lose nothing but opportunity on the downside ... liquidate fund .... rinse and repeat ....

I am not sure, but I suspect a lot of the money in this fund is the founders. I remember reading an interview with him in Trader Monthly where he said that after he founded and sold Spyglass Software for a lot of money he befriended some CBOE guys on the train and learned about options. He started a premium selling strategy where "if he was working at 9:45am he was having a bad day." I bet that is why the fund still exists with that type of drawdowns and pnl volatility.

If you were truly risk neutral selling premium is expected value positive. But no-one is, as evidenced that even Warren Buffet had problems with his short derivatives exposure.

 

[Eliot Hosewater]

The P&G portfolio looks pretty good, but the $3 million minimum might be a barrier to some people.

 

[cvds16]

yeah, Madoff's chart probably looked just like that one