LJM Forges Ahead With New Funds Despite Drawdowns

May 11 2007 | 11:22am ET

Option-writing shop LJM Partners is forging ahead with fund launches and a new hire despite a double-digit drawdown last month. The Hinsdale, Ill.-based firm this week launched the LJM Offshore Fund, a Cayman Islands-based offering, and is also readying an institutional product, the LJM Preservation and Growth Fund.

LJM’s new offshore offering is a “moderately aggressive” product that trades put spreads and short calls on Standard & Poor’s 500 futures index contracts, according to firm documents.

The offshore fund charges 2% for management and 20% for performance, with a $100,000 minimum investment requirement.

The Preservation and Growth Fund, set to launch this summer, will target risk-averse institutional investors, trading short options on the S&P futures contracts and short futures contracts.

“The fund is negatively correlated to equities and is meant as a replacement for fixed income,” says managing director Scott Sykora.

The fund, which began trading in May 2006 with about $5 million, ended its first eight months up 4.74%, though it was down 1.18% year-to-date through April. It charges 2/20, with a $250,000 minimum investment requirement.

The firm’s Neutral S&P Option Premium Writing program was down an estimated 11.5% last month, bringing its year-to-date losses to an estimated 9.72%. Sykora attributes the program’s performance to a “coincidence of three outlier events that created a short-term challenge for the strategy.”

“The first event was the big sell off on Feb. 27, which was the biggest downside volatility we’ve seen since early summer of 2002,” he explains. “Within two weeks, the Fed met and issued their go-forward prognostication on future interest rates so the market almost perfectly rebounded up about 24 S&P points. We survived the whiplash pretty well and ended the quarter up about 2% net for our managed accounts.”

Anthony Caine, LJM’s president, admitted that the program suffered redemptions, but remains optimistic about its long-term capital appreciation potential. “What we tell our clients is that this is an investment that you must turn your back on for three to five years,” Caine says. “Over the long term we feel extremely good about the risk/reward profile.”

The program, which began trading in January 1999, returned 37.72% last year, according to public databases. It currently manages some $108 million in assets and charges 2/20 with a $1 million minimum investment requirement.

In addition, Stanislav Ivanov joined the firm last month as its chief risk officer from The Options Clearing Corporation, where he had worked as first vice president for quantitative risk management.

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