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Hedge Fund Gains From JPMorgan’s 'Whale' Losses

Tuesday, 11 Sep 2012 | 2:53 PM ET

One of Europe’s largest hedge funds, Brevan Howard, reaped rewards from being on the other side of JPMorgan’s infamous “London Whale” trade earlier this year by buying up tranches of mortgage and corporate bonds.

JP Morgan Chase headquarters
Bloomberg | Getty Images
JP Morgan Chase headquarters

JPMorgan’s “London Whale” trades resulted in losses for the bank which have ballooned to $5.8 billion from the initially estimated $2 billion in May. (Read More:JPMorgan Has Sold Off Majority of Losing Position.)

The BH Credit Catalysts Master Fund, which trades credit and mortgage-backed securities and purchased the credit-default swap (CDS) contracts from JPMorgan, posted gains of 9.46 percent, year to date through August 31, according to an investor briefed on the matter.

JPMorgan’s “London Whale,” Bruno Iksil, sold default protection on the residential mortgage-backed securities(RMBS) market in the form of an index of corporate credit-default swaps. Brevan Howard is one of the biggest RMBS traders in the market, and bought a large amount of JPMorgan’s CDS.

“Both mortgage and corporate strategies were profitable in July, with the majority of the fund’s gains attributable to the mortgage strategies,” the hedge fund wrote in its monthly shareholder report for July. (Read More:London Whale Trades Led to Big Profits for BlueMountain.)

Brevan Howard’s Macro Fund has fared worse this year. That fund posted losses of 0.45 percent on the year, compared to gains of 12.5 percent in 2011.

The $2.76 billion Credit Catalysts Master fund has proven to be one of the best performers for the $36.7 billion hedge fund founded by ex-Credit Suisse trader Alan Howard. The fund returned 34.8 percent in 2009 and 13.45 percent in 2010, although only returned 1.22 percent in 2011.

In the report, Brevan Howard alluded to more gains to come in the fourth quarter. “The fund continues to find more credit-sensitive securities with strong carry and further upside catalysts,” the fund report stated. “The fund did sell a portion of its RMBS that hit price targets in July, but has continued to find further opportunities offering strong risk-reward characteristics.”

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