JPMorgan's bad trade is hedgie's gain
May 16, 2012: 7:05 AM ETA number of the funds run by former JPMorgan employees are cashing in, but not much.
FORTUNE -- Is Dodd-Frank, the law that is supposed make the banks less risky, actually to blame for JPMorgan's huge trading loss?
Earlier this year, Neil Chriss, who runs hedge fund Hutchin Hill, said in a Bloomberg interview that he was looking to profit by buying up positions that the large banks might be forced to exit because of Dodd-Frank banking reforms. It appears he found one. Hutchin Hill is one of the many hedge funds rumored to be profiting from JPMorgan's $2 billion trading blunder.
Star hedge fund manager and chess master Boaz Weinstein, who ranked 17 on FORTUNE's 40 under 40 last year, appears to be on the other side of the JPMorgan trade as well. Back in February, he told a crowd at a charity event that his no. 1 investment idea was to buy 10-year credit default swaps on the CDX IG 9, which are the exact type of CDS contracts being sold by JPMorgan's London whale. He told the attendees at the conference that the CDS contract were "very attractive" and could be bought at a very good discount.
A spokesperson for Hutchin Hill and Weinstein's Saba Management declined to comment.
Wall Streeters who specialize in the CDS market say it appears that dozens of hedge funds have piled into the anti-JPMorgan trade. A number of the hedge funds in on the trade, including BlueMountain Capital and Lucidus Capital Partners, are run by traders that formerly worked at JPMorgan. Perhaps that's not all that surprising. CDS contracts were basically created at JPMorgan more than a decade ago. So it makes sense that the traders with the most expertise in the market would come from the bank. But it's just another sign of how traders who are fleeing the big banks are coming back to haunt their old employers.
To be sure, much of the blame of the $2 billion trading loss should be heaped on JPMorgan and its flawed idea that you could make money and hedge at the same time. Nonetheless, it appears Dodd-Frank may be amplifying JPMorgan's losses. Dodd-Frank was supposed to move the risky business of Wall Street out of the really large banks that have federally insured deposits, and oh yeah, an implied backing from the government, and into hedge funds. It was known that banks would lose money because they would have to close businesses they were no longer allowed to be in. But on top of that hedge funds appear to have figured out that there is money to made by exploiting the transition and that money is coming out of the profits of the banks. JPMorgan is the first well-known example of this, but expect to see more.
Without the law, JPMorgan probably would have been able to devote more resources to the trade. In fact, Dodd-Frank was reportedly one of the reasons some hedge funds got into the trade in the first place. They figured JPMorgan's position was so large that regulators would eventually crack down on the bank and force it to sell the CDS contracts at a loss.
It didn't happen that way. The Volcker rule, which prohibits risky trading, doesn't officially go into effect for another two years. Nonetheless, as more hedge funds rushed into the trade - snapping up the CDS contracts that were being spout out by the London whale. JPMorgan's bet was that those contracts would fall in value. But as more hedge funds piled into the trade, that pushed the contracts up, producing losses at JPMorgan.
If losses at JPMorgan and other banks are being created in part by Dodd-Frank, it certainly is an unintended consequence, but it might not be a bad one. Regulators, for instance aren't going to be able police every trade at the big banks. But as the banks have mission creep away from pure hedging toward prop trading, the fact that the law allows hedge funds to be more nibble and deliver a smackdown to banks that get out of line is a good thing. True market regulation. And it could work as long as the losses suffered by the banks aren't big enough to put them out of business.
That appears to be the case here. BlueCrest Capital, another hedge fund firm that is reportedly making money off harpooning the London whale, has a closed end mutual fund that is open to anyone. The fund, BlueCrest AllBlue, which is traded on the London Stock Exchange, has about a third of its funds in the BlueCrest hedge fund that has the anti-JPMorgan trade on. But anyone that has bought into the fund hoping to make big bucks on JPMorgan's misfortune has so far been mostly disappointed. The closed-end fund's net asset value is up just 1.2% since JPMorgan disclosed the news of its trading loss last week. Not a whale of a trade.
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Facebook increases IPO size (again)
Facebook adds 83 million shares to IPO
FORTUNE -- Facebook has significantly increased the size of its initial public offering, just two days before it is expected to begin trading on the NASDAQ.
According to an amended registration document, Facebook will now offer over 421 million shares to investors. That is around 83.8 million shares more than originally offered, which would work out to another $3.19 billion in proceeds if Facebook prices MORE
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SEC warns against crowd-funding
Hold your crowd-funding horses
FORTUNE -- The Securities and Exchange Commission today issued the following statement:
On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law. The Act requires the Commission to adopt rules to implement a new exemption that will allow crowdfunding. Until then, we are reminding issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under MORE
Dan Primack - May 15, 2012 12:27 PM ETPosted in: crowdfunding, SEC -
At Obama fundraiser, no one mentions private equity
Obama raises money from private equity, hours after bashing the industry.
FORTUNE -- At a Democratic Party fundraiser, I guess it's inappropriate to mention the elephant in the room.
President Obama last night spent time at the Park Avenue apartment of Blackstone Group (BX) president Tony James, to press the Wall Street flesh and collect $35,800 per plate. It came just hours after his campaign launched its first formal attack on Mitt MORE
Dan Primack - May 15, 2012 12:15 PM ET -
Qualtrics raises $70 million from Accel and Sequoia
Big data company raises big money.
FORTUNE -- Qualtrics Labs, a 10-year-old provider of enterprise SaaS for simplifying complex research, has raised $70 million in its first-ever round of outside funding.
Accel Partners and Sequoia Capital co-led the deal, with Ryan Sweeney (Accel)and Bryan Schreier (Sequoia) joining the Qualtrics board of directors. It was the two firms' largest-ever joint investment, and also probably their biggest deal for a Utah-based company (Qualtrics is MORE
Dan Primack - May 15, 2012 11:04 AM ET -
Surprise! No one cares about earnings beats
In the first quarter of 2012, shares of companies that beat earnings expectations achieved a median two-day return of 0%. How's that for a reward?
By Mina Kimes, writer
FORTUNE -- One of the most watched--and least meaningful--financial metrics each quarter is the number of "earnings surprises," or instances in which companies' profits beat analysts' expectations.
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May 15, 2012 10:30 AM ETPosted in: Macro -
M&A
Coty Products, a global beauty company whose shareholders include Berkshire Partners, has withdrawn a $10.7 billion acquisition offer for Avon Products (NYSE: AVP).
Advocat Inc. (Nasdaq: AVCA), a Brentwood, Tenn.-based provider of long-term care services to nursing center patients, has rejected a $50 million, or $8.50 per share, buyout offer from Covington Investments LLC. www.advocat.com
Advent International has agreed to sell nuclear fuel broker Nukem Energy GmbH to Canadian uranium miner Cameco MORE
Dan Primack - May 15, 2012 10:12 AM ETPosted in: M&A -
Private equity deals
Court Square Capital Partners has acquired PRV Aerospace LLC, an Everett, Wash.-based provider of components, subassemblies and assemblies to aerospace manufacturers, from Platte River Ventures. No financial terms were disclosed. www.prvaerospace.com
Golf Town, a Canadian golf retailer owned by OMERS Private Equity, has agreed to acquire U.S. golf retailer Golfsmith International Holdings (Nasdaq: GOLF) for approximately US$96.5 million, or $6.10 per share. www.golftown.com
The Jordan Company has acquired VT Services Inc., a MORE
Dan Primack - May 15, 2012 10:11 AM ETPosted in: Private Equity -
Venture capital deals
Quora, a Palo Alto, Calif.–based Q&A site, has raised $50 million in new VC funding at a $450 million post-money valuation. Peter Thiel led the round, and was joined by Matrix Partners, Northbridge Venture Partners, Quora co-founder Adam D'Angelo and return backer Benchmark Capital. www.quora.com
Aquantia, a Milpitas, Calif.-based provider of Ethernet connectivity solutions for cloud computing and large-scale data center deployments, has raised $35 million in Series F funding. Rusano MORE
Dan Primack - May 15, 2012 10:11 AM ETPosted in: Venture Capital
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| Company | Price | Change | % Change |
|---|---|---|---|
| JPMorgan Chase and C... | 36.24 | 0.45 | 1.26% |
| Microsoft Corp | 30.21 | -0.27 | -0.89% |
| General Electric Co | 18.40 | -0.20 | -1.08% |
| Ford Motor Co | 10.15 | -0.17 | -1.65% |
| Sprint Nextel Corp | 2.47 | -0.03 | -1.20% |
| Index | Last | Change | % Change |
|---|---|---|---|
| Dow | 12,632.00 | -63.35 | -0.50% |
| Nasdaq | 2,893.76 | -8.82 | -0.30% |
| S&P 500 | 1,330.66 | -7.69 | -0.57% |
| Treasuries | 1.78 | -0.01 | -0.62% |
