JPMorgan Chase’s quantitative investment strategies (QIS) division has built a $100bn derivatives-linked trading book, delivering hedge fund-style exposures to a broad investor base at a fraction of the cost, according to a report by Bloomberg.
The bank’s Strategic Indices business has been a key driver behind the surge in QIS, a market that transforms well-established systematic trading models into swaps and structured notes, providing scalable, cost-efficient access to strategies, including trend-following and options selling.
Historically embraced by insurers and pension funds, QIS has increasingly gained traction among other investors who were once sceptical of such offerings. As demand has expanded, JPMorgan’s QIS unit has seen its notional exposures grow at an average annual rate of 15% over the past four years.
Now, the firm is broadening its quant offerings across asset classes, including commodities, emerging-market currency options, overnight rates, and even mortgage-backed securities.
JPMorgan’s $100bn figure represents notional exposure rather than actual capital deployed, as these strategies are predominantly executed via swaps. Across the broader industry, QIS desks at 13 major broker-dealers were managing a record $573bn in notional exposure as of mid-2023, according to an Albourne Partners survey seen by Bloomberg.
The structure of these strategies allows banks to codify investment rules while offering investors the flexibility to fine-tune exposures and control entry and exit timing. However, critics argue that QIS products, while cost-efficient, lack the adaptability of active fund managers and are ultimately designed to serve the bank’s interests rather than acting in a fiduciary capacity.
Another criticism centres on the potential for crowding. Some market participants blame QIS flows for degrading strategy performance, as seen with intraday momentum trades. This strategy – going long on S&P futures after a strong open and closing the position by day’s end – was highly successful during the 2020 Covid-driven selloff but suffered sharp deterioration in 2021, partly due to increased adoption by systematic players.
JPMorgan has rolled out an evolution of the approach, incorporating short-dated options and intraday strategies linked to individual stocks that form part of the $100bn leveraged ETF ecosystem.
While the bank has declined to specify targeted names, Tesla and Nvidia are among the most traded by these leveraged vehicles, where market makers’ hedging activity can amplify price moves.
Institutions such as pension funds and insurers account for roughly 70% of JPMorgan’s QIS business, with hedge funds representing a high-single-digit percentage. Retail investors gain exposure through structured products and annuities, primarily in the US.
Although QIS offerings have long been positioned as alternatives to hedge funds, an increasing number of managers are now leveraging these bank-run strategies to complement their own portfolios.
Central risk book managers, responsible for overseeing a hedge fund’s aggregate exposures, are also utilising QIS products to hedge factor risks and optimise portfolio construction.
