Ben Levine’s LMR Raises Capital After Hedge Fund Drops 12.5%

(Bloomberg) -- LMR Partners is raising capital after its main hedge fund suffered heavy losses amid the coronavirus-fueled implosion in global markets.

The $4.6 billion LMR Fund slumped 12.5% in the two weeks through March 13, according to people with knowledge of the matter. The setback led LMR to reduce its bets and stop some traders from investing, a step hedge funds typically take as part of their risk-management response to stem losses, said the people, who asked not to be identified because the information is private.

The London-based firm is now trying to convince investors to inject more capital into its main money pool as well as the $2.5 billion LMR Alpha Rates fund to take advantage of the dislocation in markets that contributed to the firm’s losses, the people said.

A spokesperson for LMR declined to comment.

It’s not clear how much capital LMR intends to raise or if investors will pour more money into a fund that’s off to its worst start to a year since its launch about a decade ago. The LMR flagship has never declined over a 12-month period.

Started by former UBS Group AG traders Ben Levine and Stefan Renold, LMR specializes in relative-value trading. This strategy involves spotting securities that are trading outside their normal price range and wagering that the discrepancy will diminish over time. Such trades flourished in the low volatility market that had long prevailed until last month, but have been hit with heavy losses during the broad market sell-off.

Biggest Wager

The so-called fixed-income basis trade is at the heart of how funds like LMR make money, and it’s by far their biggest wager. It involves getting long exposure to bonds and shorting them in the futures market where they tend to trade at slightly higher prices. This price discrepancy exists during most of the life of the trade and starts to close toward its settlement date.

Hedge funds try to exploit this price mismatch and use the repo market to leverage their bets by as much as 100 times in some cases to boost gains. The strategy backfired this month as the spread widened amid unprecedented volatility in the market, blowing out the trade and leading to large mark-to-market losses.

Many multi-strategy investment firms such as Michael Platt’s BlueCrest Capital Management pulled back from the strategy after losses, leading to even bigger declines for hedge funds that stuck with it.

Firms like LMR could recover some of their losses when futures settle -- if they’re not forced to cut their bets first by their counterparties. The trade could also offer an opportunity to those who can use the sell-off to deploy fresh capital. LMR, which manages about $8 billion, is raising the new money to take advantage of this situation, the people said.

LMR is one of the world’s steadiest hedge funds. In 119 months of existence through December last year, it posted losses in just 19, according to a letter to investors seen by Bloomberg.

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