Short volatility · Convexity · Risk disclosure
LJM: Lies, Justice & Malfeasance
A smooth return stream can be the visible premium for warehousing an invisible, nonlinear liability.
CENTRAL QUESTION
What does a low-volatility record mean when the strategy is structurally short convexity?
01 / THESIS
The argument
LJM Preservation and Growth sought capital appreciation and preservation with low correlation to equities. Its options strategies produced an attractive record during a period of subdued volatility, but the portfolio’s loss function was asymmetric: frequent small gains could coexist with rare losses large enough to dominate the entire history.
The SEC later alleged that risk was increased in late 2017 to pursue return targets while investors and the fund board received misleading assurances about stress testing and a stable risk profile. When volatility spiked in February 2018, the funds lost more than $1 billion—over 80% of managed value—across two trading days.
02 / CHRONOLOGY
The sequence
- 2013—2017
The strategy compounds through a generally favorable volatility regime and is marketed around preservation and low correlation.
- Late 2017
The SEC alleges that portfolio risk increased as the adviser pursued return targets during historically low volatility.
- FEB 5—6, 2018
A sharp volatility shock produces catastrophic losses and overwhelms the strategy’s available liquidity and risk capacity.
- FEB—MAR 2018
The mutual fund closes to new investment and proceeds toward liquidation.
03 / MECHANISM
How the failure compounds
Short convexity
Option premium is earned gradually, while losses can accelerate nonlinearly as volatility and the underlying market move together.
Model-window risk
Historical stress tests can understate exposure when the portfolio, margin rules, or volatility surface differs from the sampled episodes.
Liquidity feedback
Losses increase margin needs; margin needs force hedging or liquidation; those trades can further worsen prices and volatility.
04 / JUDGMENT
What survives the case
The central analytical error is to treat realized volatility as the same thing as risk. A return series can look stable precisely because it is accumulating exposure to an event that has not yet occurred. Sharpe ratios, standard deviation, and short lookbacks are weakest when the payoff distribution is most nonlinear.
A serious underwriting process would ask for the full payoff surface: losses under simultaneous spot, volatility, skew, correlation, and liquidity shocks; the capital required after those shocks; and whether the manager’s disclosed risk limits are binding in practice.
EVIDENTIARY LIMIT
The SEC complaint contains allegations; this brief identifies them as such. It does not substitute for the court record or make an independent legal finding.
05 / SOURCE DOCKET
Follow the evidence.
VERSION 1.0 · EXPANDED SEPTEMBER 7, 2026 · MATERIAL CORRECTIONS WILL BE RECORDED ON THIS PAGE.