‘London Whale’ Spooks Traders the World Round as He Trades Large Blocks of CDS

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“In recent weeks, hedge funds and other investors have been puzzled by unusual movements in some credit markets, and have been buzzing about the identity of a deep-pocketed trader dubbed “the London whale.”

That trader, according to people familiar with the matter, is a low-profile, French-born J.P. Morgan Chase & Co. employee named Bruno Michel Iksil.

Mr. Iksil has taken large positions for the bank in insurance-like products called credit-default swaps. Lately, partly in reaction to market movements possibly resulting from Mr. Iksil’s trades, some hedge funds and others have made heavy opposing bets, according to people close to the matter.

Those investors have been buying default protection on a basket of companies’ bonds using an index of the credit-default swaps, or CDS. Mr. Iksil has been selling the protection, placing his own bet that the companies won’t default.

Mr. Iksil, who works primarily out of London, has earned around $100 million a year for the bank’s Chief Investment Office, or CIO, in recent years, according to people familiar with the matter.

There is no suggestion the bank or the trader acted improperly.

Mr. Iksil didn’t respond to calls and emails seeking comment.

J.P. Morgan said the CIO unit is “focused on managing the long-term structural assets and liabilities of the firm and is not focused on short-term profits.”

The bank added, “Our CIO activities hedge structural risks and invest to bring the company’s asset and liabilities into better alignment.”

Kavi Gupta, a trader at Bank of America Merrill Lynch, wrote a message to investors Thursday about the mystery trader, saying hedge funds are accelerating wagers against “the large long,” or bullish investor. “Fast money has smelt blood,” he wrote. Bank of America declined to comment.

The hedge funds are wagering that the cost of default protection using the index will increase, potentially putting Mr. Iksil in a money-losing position and forcing him to reduce some of his holdings.

Buying protection on the index is currently cheaper than what it costs to protect the index’s component companies individually.

Any reduction in Mr. Iksil’s position could result in profits for the hedge funds and losses for the bank, according to a person familiar with the matter. There is no indication that any such reduction is planned.

J.P. Morgan Chase has emerged from the financial crisis as one of the strongest global banks, and Chief Executive James Dimon often boasts of the company’s “fortress balance sheet.”

Mr. Iksil’s trades are partially hedged, or protected by some offsetting trades, according to people close to the matter. Mr. Dimon is regularly briefed on details of some of the group’s positions, these people added.

One person familiar with the matter said the bank has run tests that show Mr. Iksil’s positions likely will be profitable in any economic or market downturn.

Some analysts who follow J.P. Morgan Chase, the biggest U.S. bank by assets, said they weren’t aware of the group’s trading. “They’ve talked about their investment strategies and procedures and risk controls but haven’t highlighted this division,” said Gerard Cassidy, a banking analyst at RBC Capital Market.

J.P. Morgan said the CIO unit’s “results are disclosed in our quarterly earnings reports and are fully transparent to our regulators.”

Mr. Iksil, who has worked at J.P. Morgan since January 2007, commutes to London each week from his home in Paris, and works from home most Fridays. He sometimes wears black jeans in the office and rarely a tie, according to someone who worked with him.

Mr. Iksil works with two junior traders and focuses on complex trades in credit markets, developing most of his investment ideas and then getting approval from senior bank executives, according to someone close to the matter.

In the past, he often has been bearish on markets and placed trades to express that downbeat perspective, sometimes criticizing colleagues as too optimistic on markets. Some of his best performances have come during market downturns, though he has also made trading mistakes in volatile times.

However, Mr. Iksil has turned more upbeat recently. He has been selling protection on an index of 125 companies in the form of credit-default swaps. That essentially means he is betting on the improving credit of those companies, which he does through the index—CDX IG 9—tracking these companies.

Mr. Iksil has done so much bullish trading that he has helped move the index, traders say. Now, even as Mr. Iksil is selling credit protection on the company index, a number of hedge funds and other investors are buying protection on it.

Some investors say they are betting that Mr. Iksil could have to exit some of his bullish trades, perhaps because the pending Volcker rule limiting bank risk-taking would push up the cost of credit protection. J.P. Morgan has said the Volcker rule doesn’t prohibit its CIO unit from investing or hedging activities.

A sign of how hot the trade is: The net “notional” volume in the index ballooned to $144.6 billion on March 30 from $92.6 billion at the start of the year, according to Depository Trust & Clearing Corp. data.”

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