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April 01, 2020  

Volatility Shop Bruised by March Upheaval

Volatility trader JD Capital appears to be on the ropes.

Sources are describing a situation in which equity derivatives held by JD’s Tempo Volatility Master Fund got walloped as the stock market swung wildly in recent weeks in response to the coronavirus crisis. The Greenwich, Conn., firm then was hit with a margin call from prime broker Goldman Sachs, likely forcing it to lock in losses as it exited those positions.

The decline followed a 0.5% loss in February.

Some sources said the March decline was sharp enough that it would be difficult for JD to recover. But there are no indications that JD founder J. David Rogers has decided to shutter operations.

In fact, other industry participants see a recovery as possible. Characterizing Tempo Volatility Master Fund’s January and February returns as being in line with its peers, one said nothing about the vehicle’s performance over that time would suggest a closure. There also have been no known layoffs at JD as a result of the losses.

The March decline appears to have resulted from wrong-way bets on volatility amid sharp intraday stock-market moves, with JD’s use of leverage magnifying the effects. Sources pointed in part to relative-value plays as a cause, noting that such positions have gone awry for several managers in recent weeks. The firm also invests in currency-related volatility instruments, which appear to have fared better.

JD ran more than $1 billion at its peak but appears to have contracted in recent years. The firm was managing $920 million of gross assets at yearend 2018.

JD has come close to shutting down before, specifically when losses led to the unwinding of its original flagship fund in 2009. That vehicle, Tempo Master Fund, employed a multi-strategy approach. Rogers told The Wall Street Journal at the time that he would focus on volatility investing going forward, referring to the strategy as “one of our core strengths all along.”

In addition to its current fund, JD runs two large separate accounts.

Before founding JD in 2001, Rogers was a partner at Goldman, where he gained recognition by earning the bank a $15 million profit in just one day in May 1997 by trading British Petroleum stock. The following year, he was part of a team Goldman assigned to unwind equity trades following the collapse of Long-Term Capital.