JP Morgan in $388M MBS Settlement | Chief Investment Officer

JP Morgan Chase has paid $388 million to settle a lawsuit brought by pension investors over mortgage-backed securities sold before the financial crisis.

The case was brought by investors including the $2.1 billion Fort Worth Employees’ Retirement Fund and the $1.8 billion Laborers’ Pension Trust Fund for Northern California.

According to Reuters, the lawsuit alleged that the investment bank had misled them regarding the underwriting, appraisals, and credit quality of loans backing residential mortgage-backed securities (MBS). In total the MBS contracts in question were worth $10 billion.

JP Morgan maintained that the underperformance of the investments was down to the economic downturn rather than the specific investments. Following the collapse of Lehman Brothers in September 2008, the MBS certificates’ value fell to 62 cents in the dollar or less, Reuters reported.

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In 2013 the bank agreed to a separate settlement of $13 billion with the US Department of Justice, after it alleged JP Morgan had misled investors about the security of MBS investments. Bank of America agreed to pay the Department of Justice and homeowners $16.65 billion in August last year over MBS sales.

The bank’s settlement with the pension funds is the latest in a series of major out-of-court agreements between institutional investors and organizations responsible for selling and rating MBS.

Earlier this year, California’s two biggest pensions recovered $324 million from credit rating agency Standard & Poor’s and its parent company McGraw Hill Financial. In January, JP Morgan reached a preliminary $500 million settlement with a group of pensions over MBS sales by Bear Stearns, the company it acquired in 2008.

In 2012 and 2013, Dutch pension giant ABP settled a series of cases related to MBS, including with Goldman Sachs and Ace Securities—a unit of Deutsche Bank—having invested millions of euros in the asset class.

Assets invested in exchange-traded products surpassed those held in hedge funds at the end of June, according to research.

ETFGI 1 Sources: ETFGI, Hedge Fund Research HFRSome $2.971 trillion was held in exchange-traded funds (ETFs) and other products (ETPs) at the end of the month, overtaking the $2.969 trillion invested in hedge funds by $2 billion. Data on the two sectors was provided by ETFGI and Hedge Fund Research respectively.

“This is a significant achievement for the global ETF/ETP industry, which just celebrated its 25th anniversary while the hedge fund industry has existed for 66 years,” a report by ETFGI said. “The ETF/ETP industry [has] been gaining on the assets invested in the hedge fund industry, more notably since the financial crisis in 2008.”

The data showed ETPs in general had seen larger inflows—from all sectors of the investor universe—than hedge funds in recent years. For example, ETPs saw global net inflows of $152.3 billion in the first half of 2015, compared to $39.7 billion that moved into hedge funds.

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ETFGI said investors had become disappointed with hedge fund returns after the sector had, on average, failed to beat the S&P 500 index.

“With the positive performance of equity markets many investors have been happy with index returns and fees,” ETFGI said. “This situation has benefited ETFs/ETPs, which offer an enormous toolbox of index exposures to various markets and asset classes, including hedge fund indices and some active and smart beta exposures.”

Large institutional investors have dropped multi-billion dollar allocations to hedge funds over the past 12 months, opting for potentially cheaper strategies. While this has not become a wide-spread phenomenon, it has pushed others to reconsider their positions.

ETFGI 2 Other large investors have opted to move into passive instruments, but have so far largely taken these assets in-house for long-term investment.

Despite being overtaken, hedge fund assets have never been so high—while ETPs peaked at the end of May with $3 trillion—and performance has picked up in some sectors.

By the end of May, year-to-date performance by some hedge fund strategies had already beaten what they had achieved in the whole of 2014, according to EurekaHedge. However, the data monitor said inflows—to North American funds at least—were half the totals gathered a year earlier.