Weinstein Said to Exit Bets Against JPMorgan’s Whale

Saba Capital Management Founder Boaz Weinstein
Boaz Weinstein, founder and managing partner of Saba Capital Management LP. Photographer: Daniel Acker/Bloomberg

Boaz Weinstein’s Saba Capital Management LP, which profited by betting JPMorgan Chase & Co. trader Bruno Iksil was distorting prices in a credit-derivatives index, has exited the trades as the bank unwinds its positions, according to a person familiar with the matter.

Weinstein, 39, was among hedge-fund managers who exploited gaps between the price of the index and its members created by Iksil’s outsized bets that earned him the nickname London Whale. Saba’s main $5 billion fund has returned 2.3 percent this year through June 22, said the person, who asked not to be identified because the trades are private. That compares with a 1.1 percent gain in Hedge Fund Research Inc.’s HFRX Global Hedge Fund Index.

JPMorgan is seeking to contain a trading loss in its chief investment office that stood at $2 billion when it was disclosed almost seven weeks ago. Market data is signaling that the bank unwound much of its soured positions on Series 9 of the Markit CDX North America Investment Grade Index before the quarter ends this month and the bank reports earnings on July 13.

“I suspect having the situation behind them at the end of Q2 would be desirable so Q3 can be a clean start,” said Adrian Miller, director of global markets strategy at GMP Securities LLC in New York. JPMorgan Chief Executive Officer Jamie Dimon “admitted a big mistake which clearly damaged his and JPMorgan’s credibility,” he said. “So at this point he will be judged by how this problem is rectified.”

Iksil’s Positions

Bloomberg News first reported in April that Iksil had amassed positions in Series 9 of the Markit CDX index that were so large he drove the cost of contracts on the index, known as IG9, below the average cost of credit swaps on the 121 companies it’s tied to.

For hedge funds including Saba, BlueCrest Capital Management LLP and BlueMountain Capital Management LLC, the dislocations created situations in which traders effectively were able to buy $1 of credit protection for about 80 cents, market participants said at the time.

Weinstein declined to comment, said Jonathan Gasthalter, a spokesman for Saba. Kristin Lemkau, a spokeswoman for JPMorgan, declined to comment.

BlueMountain, the hedge fund co-founded by former JPMorgan executive Andrew Feldstein, has helped unwind the trades by taking offsetting positions and then selling them to the lender, people outside the firms said last week.

Default Protection

After JPMorgan disclosed the loss, the cost to buy default protection on the index surged in anticipation the bank would unwind the trades, helping to erase the price dislocation.

IG9 climbed as much as 49 basis points after JPMorgan’s May 10 disclosure to 175 basis points on June 5, prices from data provider CMA show. The contracts have since fallen back to 163, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Dimon, who said he was “dead wrong” after initially dismissing news reports about the CIO’s trades, told the Senate Banking Committee this month that the unit had been ordered to reduce positions in anticipation of new bank-capital rules. The credit-swaps trades, initially intended to hedge against a financial crisis or deteriorating economy, “morphed into something that rather than protect the firm, created new and potentially larger risks,” Dimon told the panel on June 13.

Net wagers on the IG9 index surged an unprecedented 67 percent to $150 billion in the 17 weeks ended April 27 as Iksil was said to have amassed his position, DTCC data show. That amount dropped to $124 billion in the week ended June 22.

Dealers Make Moves

Credit-swaps dealers, of which JPMorgan is the largest in the U.S., have cut the net amount of protection they had sold on the IG9 index by 65 percent to $16.2 billion in the past four weeks, from $45.8 billion at the start of June, the data show. JPMorgan is the only one of the six-biggest U.S. banks to have sold more protection on investment-grade companies than it has bought, Federal Reserve data show.

While Iksil is still employed by the bank, Henry Kim is now trading synthetic credit in the CIO, reporting to Rob O’Rahilly, who replaced Achilles Macris as the chief investment officer of Europe, Middle East and Africa, a person familiar with the moves said last week.

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