Volcker Rule? JPMorgan Just Bought a $6 Billion Brazilian Hedge Fund

If you had any lingering hope that the Volcker Rule would keep taxpayer protected banks from acquiring hedge funds, it will be quashed by today's announcement that JPMorgan Chase has signed a deal to acquire a controlling stake in the Brazilian hedge fund Gavea Investimentos.

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The $6 billion hedge fund founded by the former head of the central bank of Brazil will be owned through JP Morgan's own hedge fund, Highbridge Capital Management.

Gavea will provide Highbridge with greater macro-economic insight and direct exposure to investing in Brazil, said Highbridge chief Glenn Dubin.

He was too polite to say that Arminio Fraga is one of the most connected guys in Brazil. Bringing him on board will help JPMorgan win business and clients there.

But what about that Volcker Rule? Wasn't that supposed to limit the ability of banks to own hedge funds?

Well, the Volcker Rule does place limits on the levels of ownership a bank can have in a hedge fund and how much a bank can contribute to a hedge funds capital. But JPMorgan has been more aggressive than other Wall Street firms in pressing the limits of this rule, arguing that its hedge funds are for clients rather than proprietary trading operations.

Here's the argument that making the rounds these days. After Bernard Madoff and several other hedge funds that turned out to be Ponzi schemes, clients want banks to own hedge funds rather than steer them to third-party funds. It's a quality control thing.

What's more, since this is all being done for clients, and the bank isn't risking its own capital, there nothing for regulators to complain about.

Of course, as we saw when Bear Stearns bailed out its two subprime hedge funds and when Citigroup bailed out its failing SIVs, just because a risk isn't technically on the books of the bank doesn't mean it wont end up there when things go south.

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