What does this hedge fund do that is so special?

They sell options on S&P futures and lost 50% in 2008. They claim to use a proprietary risk management and since the large DD have amended their VaR models.

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

 

Averaging 20% a year is decent but a 50% DD is intolerable.

 

I think it's a pretty good idea to offer investors the ability to choose a particular level of return/drawdown tradeoff. Moreover, their strategies overall performed as one would expect, so, at first glance, looks like it's a good shop.

 

Perhaps, but do the returns really warrant the DD.

 

Looks sensible to me.

The point is that you get to choose. If you don't like the drawdown, go for the less aggressive strategy. It's a lot better than a lot of funds out there that give you this return/drawdown profile without your knowledge, don't you think?

 

Since 2008, most hedge funds went bankrupt and still going bankrupt. Not much to say about that

 

The left-skewed return profile is quite typical for short-volatility strategies. As long as investors understand what they're getting themselves into I don't see a problem with this fund in particular.

It's the strategy causing the return-profile, not the specific fund.

 

I like the Moderately aggressive mandate however here are my 2 cents:

I like the annualized return but the st.dev not so much...

For an abs return strat, a -21% worst rolling 1 year is a big no-no in my book... but the worst 5 year rolling at 16% is impressive.

I don't recall seeing better option strategy mandates in recent past but overall I don't think I would put more than 10-15% of it in a Fund of HF, it increases volatility too much

 

I know their floor brokers very well as well as some of their previous investors, but this information is only current as of 2009 so it may well not reflect their current trading.

They sold strangles on S&P 500 trying to get $4.00 on each side approximately 3 months out and hoped the market didn't blow up or down. They'd roll the positions as expiration got closer or as the market moved against them. If you examine their history you will see they've had a number of blow up events.

Aggressive Fund

08/1998 -36.99%
03/2000-04/2000 -44.10%
09/2001 -24.25%
07/2002 -46.17%
09/2008-10/2008 -72.73%

If you've got the stomach for those kinds of draw downs then invest. But when it's all said & done the debit will come sooner or later.

They have some programs that appeared to have decent risk management, but at the same time some of the programs have none.

The risk guy was newly hired in 2008 when they had their most recent blow up event. They were touting their improved risk management just before that happened as well. Truth be told there's not a whole lot you can do when your option with a $.50 bid/ask spread goes to a $10-15 bid/ask spread and you have to get out.

This is a problem for all naked option sellers whether they want to admit it or not. At the same time ever strategy has it's time & place.

 

actually losing 50% in 2008 would put you right in the range of some famous buy and hold mutual funds.