Hedge fund of the year: LMR Partners

Core Insights - LMR Partners experienced a significant drawdown of over 20% in March 2020, marking a pivotal moment in the firm's evolution and risk management practices [1][2][5] - The firm has since expanded its risk management team from three to 25 members and revamped its risk governance, now running over 350 stress test scenarios compared to about 50 before [3][5] - LMR's improved risk management has led to enhanced performance metrics, with its Sharpe ratio increasing to two and Sortino ratio climbing to 8.4 since 2020 [5] Risk Management Enhancements - The firm calculates over 2,000 scenario permutations and monitors more than 1,500 strategy-specific risk flags, a seven-fold increase from five years ago [7] - LMR's risk management approach views risk as a collaborative partner, focusing on both downside protection and upside capture [5][9] - Structural reforms post-2020 addressed concentration issues and insufficient oversight, leading to a more robust risk management framework [5][13] Performance and Strategy Adjustments - Since 2020, LMR has achieved annualized returns of 13.7%, with its flagship multi-strategy fund managing $7.5 billion and only experiencing a negative year in 2020 [16][15] - The firm has shifted its strategy in response to market conditions, reducing capital in areas with declining expected returns and reallocating to more promising trades [24][28] - LMR's governance structure now includes dedicated risk managers for each product line, enhancing diversification and oversight [13][14] Future Outlook - The firm is adopting a defensive stance due to tight credit spreads and low volatility levels, while also planning to enhance its scenario analysis capabilities through cloud computing [33] - LMR aims to run scenarios more frequently, with a goal of achieving updates every 15 minutes within six months [33]