June 26, 2012 / 9:10 PM / 5 years ago

Saba's Weinstein exits bet against JPMorgan: sources

3 Min Read

NEW YORK (Reuters) - Hedge fund manager Boaz Weinstein, who was one of the first traders to call attention to a derivatives bet that cost JPMorgan Chase at least $2 billion recently exited from the trade, booking a tidy profit, according to sources familiar with the trade.

Weinstein, a former Deutsche Bank trader, was one of the early proponents of a trade that involved buying Investment Grade Series 9 10-Year Index CDS, discussing it at the Harbor Investment Conference in February. Ironically, the conference was held at JP Morgan's Madison Avenue offices.

In May, JPMorgan reported a $2 billion trading loss in its chief investment office, due to large bets on an obscure group of indexes that track the performance of corporate bonds, including the Markit CDX NA IG Series 9 index. Weinstein's Saba, among other funds, bet against that trade.

Weinstein's Saba Capital Management, which has liquidated the position in its entirety, "exited directly to JPMorgan's CIO office," according to a source familiar with the hedge fund.

Weinstein did not immediately return a request for comment.

JP Morgan Chief Executive Jamie Dimon was forced to defend his bank's policy before the U.S. Congress after disclosing the loss in May.

It could not be determined how much money Saba, which manages about $5 billion, made on the trade. The Saba Capital Master Fund rose 1 percent for the year through May. That fund has gained 2.3 percent for the year through June 22.

Saba was one of a number of hedge funds that were on the other side of the index trade from JPMorgan, a bet that turned lucrative for many of those managers this spring. Some of the other funds that made a trade similar to Saba included BlueMountain Capital Management and BlueCrest Capital Management.

Trading volume in the Markit CDX NA IG Series 9 index, which matures in 2017, ramped up significantly in January and February.

Investors believe it was around that time that JPMorgan, led by London-based trader Bruno Iksil, allowed the bet involving the index to become an outright bet on credit markets improving, instead of a hedge against severe market volatility. Iksil's trading positions were so large he was dubbed the London Whale.

The bank, which is currently trying to unwind its own side of the trade, has taken fire for its risk management practices. Meanwhile, the U.S. Securities and Exchange Commission has opened an investigation into the trading loss.

In April, before the $2 billion trading loss was made public, JPMorgan chief Dimon told analysts that reports about the so-called London Whale trades were a "tempest in a teapot."

In Senate testimony earlier this month, Dimon acknowledged he was "dead wrong" when he made that statement.

"This particular synthetic credit portfolio was intended to earn a lot of revenue if there was a crisis. I consider that a hedge," Dimon told senators on June 13. "What it morphed into, I will not try to defend."

Reporting By Katya Wachtel; editing by Matthew Goldstein, Gary Hill and Andre Grenon and Gunna Dickson

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