Hedge fund of the year: LMR Partners

Risk Awards 2026: Lessons learned in 2020 prepared LMR to handle this year’s volatility

Eric Hamard, LMR’s chief risk officer

The American football coach Vince Lombardi liked to say: “It’s not whether you get knocked down, it’s whether you get up.” 

In March 2020, LMR Partners was taken off its feet. The firm, which had never suffered a negative year, experienced a more than 20% drawdown in its flagship multi-strategy fund that month.

LMR got back up. Painful as it was, clients talk now about 2020 as a key moment in the hedge fund’s evolution. They describe the reaction of the firm’s leadership as more or less exemplary – specifically the candour of its partners and their willingness to accept mistakes and to act on them.

Those actions centred on the expansion of the $12.7 billion firm’s risk management team, from three people to 25. Risk governance was revamped. Today, LMR runs more than 350 stress test scenarios, compared with about 50 before. 

At the same time, the firm has sought to build a risk function that operates differently to others. Its use of metrics to capture market dislocations and an innovative approach to running a central book allow LMR to take risk when opportunities present themselves and avoid it when markets are fragile. 

Risk is viewed as a collaborative partner, not gatekeeper; a protector of the downside and a guide to the upside

Eric Hamard, LMR

The 2020 losses triggered a “full review” of what went wrong, says Eric Hamard, LMR’s chief risk officer. “We had concentration issues with some illiquid products. We didn’t have the infrastructure to price or stress test them properly. It came down to resourcing in the risk department and insufficient oversight and governance. Post 2020, we put in place a lot of structural reforms to tackle those points.” 

The firm’s distribution of returns in the following years reflects the work that’s been done and underlines how the improved risk management has helped boost rather than constrain the ability to generate alpha. LMR’s Sharpe ratio has improved to two from just over one. Its Sortino ratio – a measure of returns relative to downside risk – has climbed to 8.4, compared with 0.8 from inception to March 2020.

During February, March and April this year, when some other multi-strategy funds struggled, LMR benefited from having stepped back from certain popular – and painful – trades. The firm gained roughly 2.5% over the period.

Bodyguards

In its scenario analysis, the team today calculates more than 2,000 scenario permutations and monitors more than 1,500 strategy-specific risk flags – a seven-fold increase on five years ago.

In addition to conventional replays of history and standard market shocks, Hamard’s team has created a set of forward-looking scenarios to capture market dislocation events such as a Taiwan invasion or closure of the Strait of Hormuz. 

The team has also generated scenarios specifically to capture a breakdown in key market correlations — the sort of shocks that might arise from widespread hedge fund deleveraging. For the US Treasury basis trade, as an example, the firm shocks the basis between cash bonds and Treasury futures directly. “We assume that even though rates are not moving, the basis widens.”

13.7%

Annualised returns since 2020

Hamard encourages the firm’s risk managers to think of themselves as bodyguards more than police officers, he says. “We are not here only to protect the firm against downside risk. We are also here to make sure we capture as much upside as possible.”

LMR does not force its portfolio managers to deploy capital when their conviction is weak. Nor does the firm automatically retract capital because of a tripped trigger. “Risk is viewed as a collaborative partner, not gatekeeper; a protector of the downside and a guide to the upside,” Hamard says.

“Drawdowns are viewed as opportunities for discussion rather than precursors to dismissal. This allows us to scale risk strategically during dislocations rather than retrench.”

To this end, LMR relies on its dislocation scenarios as sizing tools. “When we are in a market that is complacent in terms of risk, where crowding is increasing, those dislocation scenarios will be punitive,” Hamard explains. “They naturally constrain the size of the bet we are willing to take. When the market is dislocated and the alpha is at the best level ever, that’s when we want to take risk. That’s when we deploy capital.” 

Spare capital

LMR is also happy to use its central book to allow the firm to capitalise on opportunity. Portfolio managers (PMs) who believe an idea merits greater investment than their limits allow are able to pitch trades to their product head and product risk manager. The risk team carries out a review, and the trade is proposed and voted on at the risk committee. 

For ideas that pass scrutiny, the firm creates an additional central book managed by the PM directly, on which they receive a reduced cut of profits but take no downside risk. ‘Rules of engagement’ exist to prevent a PM reducing the position in the central book but not their own book, for example.  

Occasionally – though rarely – the firm will take positions that are in drawdown into a central book, too, if the leadership believes losses are temporary and wishes to protect a PM from further risk. In such cases the PM receives none of the upside.

LMR has changed its governance also. The firm now operates with product heads and dedicated risk managers for each of its six product lines. “We wanted to make sure there was diversification in the product, and not only diversification across the products,” Hamard says.

The specialised risk managers provide a “check and challenge” to the firm’s product heads, acting as a “companion”, he says – “a critical friend that tells you when things are wrong”. 

In hiring, LMR has turned away from recruiting generalist portfolio managers in favour of bringing in PMs with narrower specialisms. This helps avoid overlapping exposures. One of the firm’s equity volatility PMs specialises in dispersion, for example, another in event-based strategies, yet another in risk recycling trades, and so on.

Pandemic trades

LMR has changed a lot since its launch by former UBS traders Ben Levine and Stefan Renold in 2010. Today the firm runs 62 sub-strategies across fixed income, equities, credit, volatility, event-driven approaches and commodities. Its flagship multi-strategy fund manages $7.5 billion.

Annualised returns over the lifetime of the firm are 11%. Since 2020, that figure has been 13.7%. Year-to-date, the multi-strat fund is up 8.5%. The firm’s convertible arbitrage fund was up more than 30%. The multi-strat fund’s only negative year remains 2020, with a 6% loss. LMR’s other funds have never had a down year.

Hamard is candid about the trades that hurt LMR most during the March 2020 drawdown.

Prior to 2020, [emerging market equities in Asia] was the best hedge you could find. What happened in March 2020 was the total opposite

Eric Hamard

The biggest was a relative value trade in volatility that gave the firm long exposure to Asian equity vol and short US equity volatility. “It was part of a big risk recycling trade that went up in the Street at the time,” Hamard says. 

Banks were looking to hedge long vol exposures in Asian equities amassed from selling structured products such as autocallables, particularly in South Korea. The trade they favoured used OTC cross-corridor variance swaps. The payoff for hedge fund counterparties effectively depended on US equity volatility realising lower than volatility in Asian markets and remaining within given bounds. 

In backtests, the positions for the fund appeared highly defensive. Usually in periods of stress, emerging market equities in Asia would move more than the US. “Prior to 2020 this was the best hedge you could find,” Hamard says. “What happened in March 2020 was the total opposite.”

As the Covid pandemic took hold, Asian countries showed a greater ability to contain the virus. The one-year implied variance spread between the Hang Seng and S&P 500 dropped to around -10 volatility points from a positive average of five volatility points in preceding years.

Multiple pods within LMR were in the trade. And because the transactions were OTC, LMR found itself at the mercy of its bank counterparties when they re-marked positions at month-end. To make matters worse, Malachite Capital Management, a $600 million AUM volatility trading hedge fund, collapsed, leaving banks with heavy losses on derivatives positions that forced them to push marks to even more extreme levels. 

The pandemic upended two other trades too.

On March 27, 2020, the ECB asked banks to hold back dividends for the financial years 2019 and 2020, causing losses in positions where LMR was long payments that were already announced but yet to be distributed. No such cancellations had ever occurred. Many in the market believe it unlikely they ever will again. Hamard refers to this as a “real Black Swan”.

And in the US Treasury market, the firm suffered losses as investors rushed to cash and Treasuries sold off, causing the Treasury cash-futures basis trade to unwind rapidly. This trade, which is often assumed to be the primary source of LMR’s losses at the time, was the least damaging of the three, Hamard says. “It was a trade that came back quite quickly.” On March 15, less than a week after the unwind began, the US Federal Reserve pledged to purchase at least $500 billion of Treasuries to stabilise the market. 

Avoiding reversals

Five years on, recent events have underlined the value of LMR’s reaction.

The release by China’s DeepSeek in February of an open-source AI model that achieved high performance but with far lower development costs triggered the first leg of a momentum reversal, as tech stocks dived. Index rebalancing strategies popular with multi-strategy hedge funds, which are naturally long momentum, were caught in the sell-off. 

For LMR, index rebalancing has been a core strategy. But from mid-2024 the firm had started to reduce capital in the area after seeing some alpha decay, concluding that new entrants were crowding out returns. “When the expected return in a strategy goes down, we don’t increase leverage because we want to keep the returns. We do the exact opposite,” Hamard says.

Related

Trump tariffs turn swap spreads into ‘pain trade’ 

Hedge funds bet big on Treasuries to outperform swaps. The opposite happened.

Conversely, the firm reallocated to the index rebalancing trade after March and generated strong positive returns from doing so in May when indexes next updated.

Elsewhere, Hamard and his team had alerted equity long/short PMs to a build-up of momentum exposure in their books as a result of successful positioning in stocks that had performed well towards the end of 2024.

LMR imposes dedicated limits for individual factors as a percentage of the total volatility in the book, but those were not yet flagging danger. “None of our PMs were close to limits,” Hamard says. However, the firm’s portfolio analytics team, a sub-group within risk, warned that momentum was entering an “unwind danger zone” based on the factor’s performance patterns over the past 30 years. Several of LMR’s largest pods reduced exposure.

The risk team played a role, too, in helping avoid another pain point this year – April’s swap spread unwind.

The trade had gained popularity after the November US elections, with investors betting the incoming administration would relax regulatory rules that encourage banks to trade interest rate swaps over holding cash Treasuries. A change was expected to narrow a long-standing spread between the two instruments.

After president Trump’s Liberation Day tariff announcements, though, a spike in Treasury yields caused the discount of Treasuries to swaps to widen during the week of April 7 and forced many hedge funds out of the trade.

LMR held a swap spread position at the end of 2024 and in the early months of 2025, but reduced it “massively” before April’s US tariff announcements, Hamard says. “We talked a lot about positioning and about this trade becoming crowded, and I think that influenced and informed the PM in question in reducing the position ahead of the widening.” 

LMR has had its bumps, of course. After 18 consecutive months of positive returns, the firm’s multi-strat fund lost money in September when a usually benign and defensive carry trade in mortgage-backed securities performed badly due to a sudden increase in prepayment expectations. In that case, the firm took the mortgage positions into its central book, and continues to expect prepayments to realise lower than markets have priced. Hamard is optimistic the trade will recover the losses over the next three to six months.

Looking ahead, the firm is taking a “fairly defensive” stance, Hamard says. Credit spreads are the tightest ever, FX implied volatility is trading at one of the lowest levels in a decade. “Even the Vix is not expensive,” he says. “Our PMs basically have come to the same conclusion as us, which is that you shouldn’t be short those parameters at the moment, and maybe it makes sense to be long.” 

In the meantime, LMR is working on what Hamard calls “Scenarios 2.0” – a “complete rebuild” of the firm’s scenario infrastructure. More extensive use of cloud computing will allow the firm to increase the number of scenarios it runs and to run them more often. At present this happens two to three times a day. By the end of the year, Hamard plans to run scenarios every half hour. Within six months the ambition is to reach 15 minutes.