February 28, 2018 / 3:29 PM / a year ago

UPDATE 2-U.S. LJM fund wiped out by 'vol-mageddon' to close -filing

(Adds fund's assets under management at beginning and end of February, background)

By Trevor Hunnicutt

Feb 28 (Reuters) - A U.S. mutual fund that lost most of its value earlier this month after its bets on stock-market volatility soured will shut its doors in March, filings with securities regulators showed on Wednesday.

The LJM Preservation and Growth Fund will be liquidated and closed by March 29, according to the filing. The fund held assets worth $812 million at the beginning of the month but has shriveled to $14 million.

Chicago-based LJM Funds Management Ltd, run by Anthony Caine, is among the more spectacular casualties from a series of "vol-mageddon" blowups of complex investments on Feb. 5 that effectively bet on markets remaining calm.

The Preservation and Growth Fund lost half its value on Feb. 5, and then lost much of what remained the day after as it unwound remaining holdings at unfavorable prices to raise cash, the company told investors in a letter.

On Feb. 7, LJM closed the fund to new investment after losses totaling 80 percent.

LJM had been one of a handful of fund companies that found success selling relatively complex and high-fee "liquid alternative" funds to investors hoping to cut risk and boost returns.

Demand for such products has persisted even as the investment management industry's profits are being hollowed out by a move to use lower-cost funds, some which simply track an index.

The LJM fund took in $393 million in new cash from investors in 2017, its best sales since launching in 2013, according to the Lipper unit of Thomson Reuters, despite fees as high as 3.34 percent a year.

It was not immediately clear if LJM's affiliated private investments will continue.

In letters to clients this month, Caine, a veteran of the 1990s technology boom who later went into finance, said he had planned to resume investing despite the losses. The Preservation and Growth Fund was also run by Anish Parvataneni, a former trader for well-known investor Ken Griffin's Citadel.

"Volatility and options markets experienced an extreme outlier event," Caine said in one of the letters. On Feb. 5, the Cboe Volatility Index, the most widely followed barometer of expected near-term volatility of the S&P 500 index, logged its largest single-day jump. "Monday's losses were so severe because as volatility spiked exponentially in the afternoon, the illiquidity in the markets severely limited LJM's ability to reduce risk."

Phone calls to the fund's Chicago-based manager and an affiliate, LJM Partners Inc, have not been returned. A Reuters reporter who visited their headquarters recently was escorted out by LJM's chief compliance officer, Katy McBride, who declined to answer questions.

Caine's next challenge may be in court. Investors are suing him and Parvataneni over what they said were inadequate disclosures. The fund touted its ability "to deliver solid returns while maintaining risk parameters" in its most recent annual report to shareholders. (Reporting by Trevor Hunnicutt in New York Additional reporting by Richa Naidu in Chicago and Saqib Iqbal Ahmed in New York Editing by Jennifer Ablan and Jonathan Oatis)

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