A hedge fund run by a former J.P. Morgan Chase & Co. executive who helped create the credit-derivatives market is aiding the lender as it unwinds trades in an index at the heart of a loss of more than $2 billion.
BlueMountain Capital Management, co-founded by Andrew Feldstein, has been compiling trades in recent weeks that would offset J.P. Morgan’s risk in Series 9 of the Markit CDX North America Investment Grade index, then selling the positions to the bank, according to three people outside the firms who are familiar with the strategy. That allowed the bank, which is said to have amassed as much as $100 billion in bets on the index, to unwind trades outside the traditional web of dealers.
“They used BlueMountain to disguise what they were doing,” Peter Tchir, founder of macro advisory firm TF Market Advisors, said in a telephone interview. “It all gets a little bizarre and shows how screwy this whole market is.”
J.P. Morgan tapped BlueMountain as a middleman after trades in its London chief investment office grew so large the bank was creating price distortions that hedge funds sought to exploit, said the market participants, who asked not to be identified because they weren’t authorized to discuss the trades. BlueMountain was one of the funds that benefited from the price dislocations, the people said.
Doug Hesney, a spokesman for BlueMountain, declined to comment, as did J.P. Morgan’s Kristin Lemkau.
Trading volumes in the past three weeks signal J.P. Morgan has been unwinding its positions in the Markit CDX index known as IG9, a credit-default swaps benchmark created in 2007 that’s linked to the debt of 121 companies in the U.S. and Canada.
A record $31 billion of IG9 index contracts expiring in December 2017 traded June 19, up from a daily average of $2.4 billion in the previous three months, according to Markit Group, which administers the index.
The trading surge in the contracts that fueled much of J.P. Morgan’s loss follows a 35% reduction in the net amount of protection that dealers sold on the index in the three weeks ended June 15, data from the Depository Trust & Clearing Corp. show.
J.P. Morgan is seeking to stem the losses after its chief investment office shifted its strategy of buying credit-default swaps on corporate debt to protect the bank against a financial crisis or deteriorating economy. At the start of the year, the group was ordered to reduce its positions and instead executed a series of trades that left the bank with even bigger and harder-to-manage exposures, CEO Jamie Dimon told the Senate Banking Committee in Washington last week.
Mr. Dimon declined to disclose the size of the loss, saying the bank will provide that information along with more details of the position when J.P. Morgan reports earnings on July 13. Unwinding the positions by the end of this month allows the bank to take losses in the current quarter.