Funds hit by JPMorgan's CDX moves Large positions in credit derivatives taken by JPMorgan Chase in London are frustrating hedge funds and drawing attention to the might of the bank's chief investment office. Participants said JPMorgan had amassed a big position in an index of credit default swaps, sufficient to move the market and hurt hedge funds that have taken the other side of the trade. Bruno Iksil, a trader at JPMorgan's CIO, had placed many of the trades, people familiar with the matter said, earning himself the moniker "the London whale." The division is run by Ina Drew, a member of the JPMorgan operating committee. Hedge fund managers have piled into long positions on the CDX index, expecting spreads to widen as sentiment deteriorates after one of the best three-month runs in credit in years. Credit spreads on the index have narrowed steadily since the European Central Bank moved to stabilise the European financial system in December with a big liquidity injection through its Long Term Refinancing Operation. In late March, the index dropped to levels not seen since before the collapse of Lehman Brothers. "It has been the mother of all credit rallies," said Suki Mann, a credit strategist at Société Générale. "The repricing has been fairly indiscriminate," said one hedge fund manager, who hopes to profit from a "decompression" trade, whereby less creditworthy companies reprice relative to their more stable peers in the index. Some managers have latched on to discrepancies in pricing between the individual constituents of the CDX index and the index itself. The index trades tighter than the sum of its parts, meaning managers can short the index and buy its constituents to lock in a credit risk-free profit. Such trades are not without their pitfalls, however, as several London-based hedge funds have learnt. The index has tightened even further relative to its constituents, causing pain for hedge funds that have to meet margin calls with their brokers in order to keep the trade on or face being knocked out of it at steep losses. Hedge funds say that it is JPMorgan's large position in the index, which was first reported by Bloomberg, that is causing a distortion. "The risk in this kind of trade is always that one leg widens when you don't expect it to," said one credit hedge fund manager. The thing I'd be questioning, though, is why JPMorgan has such a big directional position when banks aren't supposed to be prop trading any more. The bank, which has officially migrated its credit prop trading desk, headed by Fahad Roumani, into its asset management division, says the CIO does not do proprietary trading, which is due to be banned this year in the US. "CIO is focused on managing the long-term structural liabilities of the firm and is not focused on short-term profits," said JPMorgan. Our CIO activities hedge structural risks and invest to bring the company's assets and liabilities into better alignment. That does not mean it is automatically exempt from the Volcker rule, the prohibition on proprietary trading that is a considerable headache for investment banks. The problem comes in the detail; regulators are struggling to come up with satisfactory ways of dividing banned trading from permitted activity such as hedging and market making. The CIO works with the bank's treasury operations to manage liquidity and hedge company-wide risk, though can also take positions designed to make money, according to people familiar with the structure. It is common at investment banks, though JPMorgan has more heft than competitors because of its large presence in retail, commercial and investment banking. According to company filings, the CIO and treasury together managed an investment securities portfolio last year that averaged $331bn. Although it draws much less attention than the company's investment bank it had the same maximum daily value at risk of $80m last year, according to the company. In its own comment letter to regulators, JPMorgan specifically refers to the chief investment office and the potential for hedging activity to be banned. Barry Zubrow, head of regulatory affairs, wrote to officials to describe how the group had previously used credit derivatives to buy and sell protection on indices: "This strategy resulted in the firm recognising some gains as near-term default risks increased. The gains recognised on these derivatives strategies offset in part the losses that occurred on credit assets held by the firm. Under the proposed rule, this activity could have been deemed prohibited proprietary trading. The letter from Mr Zubrow adds that "as currently drafted, the [hedging] exemption would fail to protect - or, to much the same effect, leave in doubt the protection of - numerous legitimate ALM [asset-liability management] hedging activities."