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Hedges fail their first stress test

Photo: Reuters

UK pension fund hedges have failed the first real stress test in a new era of rising interest rates. Bankers are surprisingly relaxed about the implications for other threats to global systemic stability.

JPMorgan chief executive Jamie Dimon downplayed the impact of the crisis in UK pension fund liability-driven investment (LDI) hedging during the bank’s quarterly earnings call on October 14, without dismissing the risk of further risk management accidents entirely.

“The LDI thing was a bump in the road,” Dimon said, before admitting: “I was surprised to see how much leverage there was in some of those pension plans.”

Dimon highlighted the opportunity for JPMorgan’s traders from a spike in spreads on collateralized loan obligation (CLO) deals that was exacerbated by the selling of assets by UK pension funds as they scrambled to raise cash to cover collateral calls on hedges.

“I want our people, when they [CLOs] gapped out like 300 or 400 basis points, I want them to be willing to buy,” he said.

Bankers further down the food chain who deal directly with funds are also keen to look for the bright side of the UK’s debt crisis.

One head of cross-asset sales to UK pension funds and insurance companies highlights to Euromoney the business opportunity as risk is shifted from one side of his client coverage to the other.

“Insurers are fine, they’ve not really had any issues and they are seeing hundreds of billions worth of pension funds that are going to be coming to market to be sold to them,” he says.

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Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks
Jon Macaskill
Jon Macaskill is a leading financial journalist with more than 25 years’ experience covering banking and markets from London and New York. He was named Best Editorial Commentator in 2016 State Street Institutional Press Awards for his monthly column in Euromoney