Recover the trade, do not get stopped out
From offices on the 58th floor of the Chrysler Building in Midtown Manhattan, Mr. Weinstein runs a $5.5 billion hedge fund firm called Saba Capital Management. ("Saba" is Hebrew for "grandfatherly wisdom," a nod to his Israeli roots.) It was there, last autumn, that he noticed an aberration in the market for credit derivatives. He knew from experience what it was like to lose a lot of money at a big bank. Before starting Saba, he was responsible for a team that lost nearly $2 billion, in the depths of the financial crisis, at Deutsche Bank. Others lost even more. Last November, however, he saw that a certain index seemed to be trading out of line with the market it was supposed to track. He and his team pored through reams of data, trying to make sense of it.
It was his pick for the "best" investment idea of the moment. Mr. Weinstein recommended buying the Investment Grade Series 9 10-year Index CDS -- the same index that Mr. Iksil was shorting.
Standoffs are not uncommon on Wall Street. An aggressive trader makes a wrongheaded bet, then doubles down to scare off competitors on the other side of the trade. Market rivals often get slapped down, unwilling to keep buying as the other side is selling, or vice versa. For traders with the backing of a major bank, like JPMorgan, the task is much easier.
But not always. Sometimes, the other side sits tight, then hits back in force. And it does so in numbers.
By January of this year, the trade against the London Whale was not going well for the hedge funds. The price of the index, as well as others, was still falling, and the losses were mounting for Mr. Weinstein and the others. But by February, it was clear that a single, big player was behind the selling. On trading desks in London and New York, everyone was talking.
the London Whale was so big that, for months, the hedge funds betting against him simply got steamrolled. One of Mr. Weinstein's funds at Saba was down 20 percent heading into May.
Then the tables began to turn, as news reports about Mr. Iksil, fed by the hedge funds, began to surface on both sides of the Atlantic. Suddenly, everyone was checking out the obscure index that Mr. Weinstein and others had seized upon.
By May, when fears over Europe's debt crisis again came to the fore, the trade reversed. The London Whale was losing. And Mr. Weinstein began to make back all of his losses -- and then some -- in a matter of weeks.
Other hedge funds were also big winners. Blue Mountain Capital and BlueCrest Capital, both created by former JPMorgan traders, were among those winners. Lucidus Capital Partners, CQS and a fund called III came out ahead, too.
INSIDE the hedge fund world, some joked that Mr. Weinstein had been able to spot the London Whale because he himself had been a whale once, too.
Mr. Weinstein was a pioneer in complex credit derivatives, latching onto them early in his tenure at Deutsche Bank, before they became the financial weapons of mass destruction that worsened the financial crisis. He was a profit machine at the bank, notching earnings in 10 of his 11 years trading there. At 27, he became one of the youngest managing directors in the bank's history. Before his book blew up, Mr. Weinstein was reportedly pulling down about $40 million a year. He exploited price discrepancies and piled leverage into his trades.
Then his team at Deutsche Bank lost $1.8 billion during the 2008 financial crisis. The trading losses ruined bonuses throughout the bank, and ruffled more than a few feathers.
He would later leave the bank and, along with 12 of his colleagues, set up Saba. Mr. Weinstein started it with $140 million -- a pittance by hedge fund standards. In the intervening years, he has outperformed his peers and managed to vacuum up assets at a time when most growing hedge funds have been struggling to hold on to what they've got. He now controls more than $5.5 billion.
The similarities between Mr. Weinstein and Mr. Iksil still resonate in the market.
"It was one whale versus another whale," one hedge fund manager said.
Those who have traded against Mr. Weinstein describe him as an aggressive trader who bets big and moves fast.