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(Bloomberg) -- A JPMorgan Chase & Co. quant unit has amassed a $100 billion derivatives-powered trading book, offering hedge fund-like investing on the cheap to investors of all stripes.
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The bank’s Strategic Indices business has been at the forefront of the boom in what are known as Quantitative Investment Strategies, or QIS, which turn well-known systematic trades into swaps or structured notes — making copycat products that are easier and more cost-effective to deploy.
QIS have been a hit with the likes of insurers and pension funds for providing classic hedge fund-style exposures such as trend following and options selling at a fraction of the cost. And lately even the fast money — once-hostile to these competing investing products — has been warming up to the strategies.
Against that backdrop, the underlying value associated with these trades, or notional exposures, has risen an average 15% annually over the last four years at the JPMorgan unit. Now, the Wall Street bank says it’s increasingly broadening out its quant offerings across assets, including commodities like natural gas and options on emerging-market currencies and overnight rates. Even trades tied to mortgage-backed securities are next in its sights.
“We want to continue finding new market opportunities and help our clients get exposure to many more of those markets which frankly can be more challenging to access,” said Arnaud Jobert, JPMorgan’s London-based co-head of global strategic indices. “Unlike a lot of the funds out there who do have a flagship offering, we can tailor very quickly bespoke profiles for many of our investors.”
Crowding Criticism
JPMorgan’s $100 billion is the outstanding notional amount of exposures, rather than actual cash invested, since the strategies often take the form of swaps. By one estimate, QIS units across 13 broker-dealers were running a record $573 billion as of last June, according to an Albourne Partners survey seen by Bloomberg News.
In a typical trading unit of this kind, a bank draws up and implements a rulebook for each strategy, but the investor can customize the exact details and decides when to move in and out of the trade.
Critics argue the swaps are blunt tools — cost-effective and easier to trade, but unable to respond to shifting markets in the way a money manager could. And unlike asset managers, banks selling QIS have no fiduciary duty to the purchaser.