Credit funds get boost from JP Morgan loss: survey

LONDON Tue Jul 31, 2012 6:43am EDT

JPMorgan Chase & Co's international headquarters are seen on Park Avenue in New York July 13, 2012. REUTERS/Andrew Burton

JPMorgan Chase & Co's international headquarters are seen on Park Avenue in New York July 13, 2012.

Credit: Reuters/Andrew Burton

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LONDON (Reuters) - The type of hedge funds that bet against JP Morgan and made money from its $5.8 billion "London Whale" trading loss has risen to the top of investors' buying lists for the coming quarter, a survey showed.

Of 157 investors polled across the globe, 53 percent said they planned to allocate cash to credit relative value funds in the coming quarter, according to Credit Suisse's mid-year Hedge Fund Investor Survey.

This hedge fund strategy seeks to profit from dislocations in fixed income markets, and many have performed well this year after taking advantage of the U.S. bank's losing position in credit derivatives.

Robert Leonard, global head of Capital Services at Credit Suisse, said news of the funds' gains from the JP Morgan loss probably boosted the appeal of the strategy. Investors are also demanding trading styles that are less exposed to the economic headwinds causing havoc elsewhere.

"Investors have got plenty of volatility in their book right now. They are looking for strategies that are less volatile, and I think credit is one of those," he told Reuters.

The credit relative value fund strategy was the fifth most popular when Credit Suisse conducted an earlier survey, before JP Morgan's loss came to light.

By comparison, 50 percent of the investors said they planned to increase their allocation to global macro funds, which were the most sought type of fund at the start of the year, the survey showed.

In May, JP Morgan reported a $2 billion trading loss, which then swelled to $5.8 billion, after the bank's Chief Investment Office made bets now known as "the London Whale trades" on derivatives linked to corporate debt.

The loss proved an embarrassment for the bank and led to criticism of boss Jamie Dimon. The outsized bets also distorted the price of certain credit derivatives and offered shrewd hedge funds a chance to profit when the bank was eventually forced to sell.

According to Hedge Fund Research, the HFRI Relative Value (Total) Index was up 4.18 percent to mid-July, more than double the 1.87 percent average hedge fund gain.

Some individual credit relative value funds have performed even better.

BlueMountain, the firm co-founded by Andrew Feldstein, has seen its Credit Alternatives Fund rise by more than 10 percent by mid-July, while Brevan Howard's Credit Catalysts Fund was up more than 7 percent, private investor data shows.

Some funds such as Boaz Weinstein's Saba Capital have since exited their bets against JP Morgan, but other managers still remain confident dislocations elsewhere in credit markets will offer new opportunities, fund sources said.

Meanwhile, the results of the Credit Suisse survey may worry managers of equity long-short funds.

Yet to rebound from a poor 2011, the strategy is set to suffer the most withdrawals in the coming quarter as 26 percent of investors indicated that they planned to cut exposure.

"The good news is we haven't see a big exodus from the space ... But I do think in the second half of the year, that is going to be a different story. It's going to be a time when a lot of investors draw conclusions based on how their managers perform," Leonard said.

More than four-fifths of investors polled expect to make allocations to hedge funds in the coming quarter, and 63 percent indicated that they had made allocations in the past quarter, the survey found.

(editing by Jane Baird)

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