As everyone knows, the S&P continued its recent run and rallied strongly in July. In fact, the past five month stretch is of historic proportions: The WSJ reports that the past five months has represented the strongest move since 1938 and a remarkable +48.26% since the trough of 676.53 posted on 9March2009 (as I write this the S&P spot has again crossed the 1000 milestone!).
When markets move this strongly to the upside, all of the LJM investment strategies will experience suffer short term losses, i.e. these losses are expected and are consistent with the investment strategies. Another way of expressing this is that all LJM trading strategies are negatively correlated with the S&P index during strong market rallies. LJM’s recovery will occur when the rally slows or we enter the typical phase of short term profit taking. During either of these periods, all LJM investment products are expected to generate positive returns.
Clients have inquired about hedging this negative correlation for upside moves in the S&P index and the most expedient solution is holding a basket of long equities within the broader portfolio. Attached is a newsletter sent to clients in Feb2009 which positions the complimentary nature of the LJM P&G Strategy with the S&P: During 2008, while the S&P was down 38.5%, LJM P&G was up almost 9%. During 2009, the LJM P&G Strategy remains in positive territory even while the S&P is up over 11% (YTD) as of this writing. A similar message can be made for the LJM Fund (Moderately Aggressive Strategy): Despite losses in October2008, the LJM Fund strongly outperformed the S&P in 2008 and remains ahead of the S&P index in 2009 (YTD through July 31). Part of our marketing message is therefore the complimentary fit of these strategies within the broader portfolio. No investment class generates positive returns in all market scenarios.
Despite the recent optimism I think most investors remain “cautiously optimistic” in the sense that they retain an on-going concern for market corrections should the economic recovery stall. LJM is developing a sophisticated risk management strategy which allows us to trade the hedge positions in the LJM Fund and LJM P&G Fund in a precise and efficient manner. In the next few weeks we hope to announce a proprietary LJM risk platform that integrates a well-known commercial software technology for trading options with the proprietary LJM STORMSM System. Once announced, this sophisticated and proprietary platform will be featured on our website and integral to our marketing materials.