JPMorgan flagship hedge fund stalls

One of the world's largest hedge fund firms inside one of the world's largest banks is stalling, underscoring the challenges faced by other increasingly large money managers.

JPMorgan Chase's asset management unit's majority purchase of Highbridge Capital Management in 2004 long seemed like a win. The hedge fund firm assets grew from about $7 billion at the time of the sale to $37 billion in 2007.

But Highbridge's fast growth has slowed in recent years. Assets have declined since their pre-financial crisis peak to $24.5 billion as of Jan. 1; performance by its flagship hedge funds have been middling; and the firm has undergone notable personnel changes, not all of them planned.

JPMorgan is the second largest hedge fund manager in the Americas by assets, controlling $59 billion as of Jan. 1, according to a ranking by industry data and news provider Absolute Return. Of that, $12 billion is from Highbridge; $47 billion is in other bank-controlled hedge fund vehicles.

Most importantly in a numbers-driven industry, two of the firm's most prominent funds have produced uninspiring returns in recent years. The flagship multi-strategy fund, Highbridge Capital Corporation, has underperformed its peer group in four of the last five years, according to benchmark returns from HedgeFund Intelligence.

The firm's smaller stock-focused fund has fared slightly better but has also rarely beaten the index return.

Darin Oduyoye, a spokesman for JPMorgan, declined to comment on behalf of the bank, Highbridge, and its Brazilian subsidiary Gávea Investimentos.

Highbridge has also undergone changes at or near the top. Billionaire co-founders Glenn Dubin and Henry Swieca are no longer in control as part of what Dubin said last year was an orderly "succession plan."

Swieca left to launch his own firm, Talpion Fund Management, in 2010 after serving as Highbridge's chief investment officer from inception in 1992 to its full sale to JPMorgan in 2009 (Talpion is now a family office).

Dubin has also pulled back. In July 2013, the firm announced that Scott Kapnick had replaced Dubin as CEO. Dubin remains at the firm as chairman and is now running his own family office, Dubin & Co., which is still invested with Highbridge. He is also an active philanthropist.

"I am delighted to be taking this next step in the evolution of the Highbridge franchise. After more than 20 years at the helm, I have decided that it is time to step away from my day-to-day activities as CEO of the firm," Dubin said in a statement at the time. "I will continue to remain active in my role as chairman and provide the firm with strategic advice and business counsel."

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There have been other departures as well.

In March, The Wall Street Journal broke news that Adam Bernstein, a technology sector head, and Mark Hoffman, head of stock trading, were preparing to leave to launch their own hedge fund.

Another to depart this year is Kristopher Drankiewicz, a technology and healthcare portfolio manager who worked at Highbridge since 2007. He has founded a new firm, Madera Technology Partners, according to his LinkedIn profile.

There were other notable departures in 2013. The most senior was Todd Builione, Highbridge's president and CEO of its hedge fund business, who left in July for KKR. Amy Yates Capone, the firm's more junior chief administrative officer, left in October to found her own human resources consultancy.

Other exits in recent years include Catherine Vaughn, the head of investor relations who left for Hutchin Hill Capital in 2012, and Carl Huttenlocher, the head of Asia who left to launch his own hedge fund Myriad Asset Management in 2011.

None of the recent departures responded to a request for comment.

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To be sure, there does not appear to be a mass exodus and some churn is expected at a large organization. Highbridge has actually grown recently, from 303 employees in May 2013 to 318 as of May 9, 2014, according to a person familiar with the firm.

In fact, Highbridge has hired 10 portfolio managers and their respective teams in the last 12 months from well-known private investment firms like SAC Capital Advisors, Millennium Management, Claren Road Asset Management, York Capital Management and Shumway Capital, according to the person.

For example, Highbridge recently hired two portfolio managers from SAC—Wayne Chambless and Christopher Procaccini. The move was first reported by The New York Times.

Highbridge's $7 billion Brazilian unit has also recently performed poorly.

Gávea's flagship hedge fund, which makes bets based on macroeconomic trends, is down 3.25 percent this year through April, according to investors materials. The fund also gained just 2.71 in 2013 and 8.19 percent in 2012. It lost 0.35 percent in 2011.

Gávea co-founder Arminio Fraga, the former president of Brazil's central bank, is currently advising opposition presidential candidate Aecio Neves in preparation for October elections in the South American country.

"Arminio is advising Senator Neves on economic matters and focused on the activities of Gávea, as always," Gávea CEO Amaury Bier said in an email to CNBC.com

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—By CNBC's Lawrence Delevingne