JPM prime brokerage global hedge fund trends august 2013

J.P. Morgan Prime Brokerage Global Hedge Fund Trends
1
This material is provided by J.P. Morgan’s Prime Brokerage business for informational purposes only. It is not a product of J.P. Morgan’s Research Departments.
For Institutional Investors only. For the intended recipient only. The reference period for this publication is July 2013 unless otherwise stated.
August 14, 2013
Executive Summary
After a challenging June for most risk assets,1
positive
earnings and less concern regarding central bank tightening
helped fuel a broad rally. Nearly all of the major equity
markets experienced month-over-month increases. In the
aggregate, hedge funds posted gains of +1.36% with positive
contributions from equity long short (+2.50%) and event
driven (+1.54%) strategies amidst a reasonably strong
earnings season. Global macro managers, particularly
systematic funds, continued to struggle (-0.11%).2
Leverage
For all accounts in the Prime Brokerage portfolio, gross
leverage3
increased from 1.81 to 1.84 (+1.40%) in July. For
equity-biased strategies, net exposure4
declined from 0.82 to
0.78 (-4.85%). Net leverage fell from 0.69 to 0.66 (-3.97%)
but remains above its 52-week average of 0.63.
Securities Lending
During July, securities lending activity in the U.S. Prime
Brokerage book reverted to the 2013 trend of strong net
covering. July’s reduction in short exposures was concentrated
heavily in single name equities, although ETFs also were net
covered. The fixed income book in Prime Brokerage ended
July net shorted for the first time in six months.
Institutional Investor Sentiment
In North America, allocators remain most interested in equity
long short and equity-biased event driven strategies. However,
most new flows are going to a select group of larger,
established managers. In Europe, there has been a slight uptick
in interest in global macro. Allocators in Asia are beginning to
turn away from structured credit. Investors in Asia remain
interested in better-performing global macro managers and
uncorrelated strategies.
Market Perspectives
July was marked by a growing dichotomy between developed
markets and emerging markets. This bifurcation could widen
further if the Federal Reserve, reacting to continued U.S.
expansion, begins to slow its bond buying in September, as
investors will no longer see emerging markets exposure as a
fruitful means through which to capture yield.
1
Assets other than cash and government fixed income securities.
2
Hedge fund strategy returns are based on data supplied by Hedge Fund Research.
3
Gross leverage is the total market value of long and short positions divided by clients'
equity in J.P. Morgan’s Prime Brokerage portfolio.
4
Calculated for Equity Long Short and Market Neutral funds on J.P. Morgan’s Prime
Brokerage platform only. Net leverage is defined as the market value of long positions
(LMV) minus the market value of short positions (SMV), divided by clients’ equity (Eq).
Net exposure is defined as the ratio of LMV and SMV, minus one.
Figure 1: July 2013 performance
HFRI and Market Indices. Monthly Returns
Source: Bloomberg, Hedge Fund Research
Table 1: Performance of hedge fund strategies and asset classes
HFRI and Market Indices5
Jul-13 Year-to-Date
HF Index 1.36% 4.73%
Equity LS 2.50% 7.68%
Event Driven 1.54% 7.02%
Macro -0.11% -0.98%
Relative Value 0.42% 3.43%
S&P 500 5.09% 19.62%
Fixed Income 1.14% -4.72%
CMDTY 4.47% -1.23%
USD -2.03% 2.11%
Credit 0.86% -2.16%
Figure 2: Hedge fund beta to equities
Rolling 21-day beta of HFRX equal-weighted index returns to the S&P 500 Total Return
Index
5
Market indices from Bloomberg are as follows: S&P 500 (SPTR Index), Fixed Income
(JPMGGLBL Index), CMDTY (SPGSCI Index), USD (DXY Index), and Credit (JULIR
Index).
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
HF IndexEquity LS Event
Driven
Macro Rel Value S&P 500 Fixed
Income
CMDTY USD Credit
2,200
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
3,100
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13
Equity Beta (LHS) S&P 500 Total Return Index (RHS)

Prime Brokerage Global Hedge Fund Trends – Performance, Leverage, and Risk Exposures
2
This section presents a summary of the changes that we have observed in leverage and sector exposures across the range of hedge funds that we
work with. The confidentiality of our clients’ positions is important to us and as such this information has been aggregated and displayed in an
anonymous manner in an effort to mitigate the risk of revealing or alluding to any one fund’s exposures. Information may be excluded due to the
perceived risk of revealing sensitive information. The information discussed is specific to activities on J.P. Morgan’s books, and may not represent
total client activity. These numbers should only be viewed as representative observations.
Market Overview6
July was a bookend to June. Whereas risk assets were lower
across the board in June, partly in reaction to hawkish
guidance from the Federal Reserve, they rallied broadly in
July. Almost all major equity markets experienced month-
over-month increases. The S&P 500 Index7
continued its
year-to-date ascent amidst a reasonably strong earnings
season, rising +4.95% in July and crossing the 1700 threshold
for the first time in its history. Other key equity indices also
rallied in July, with Europe experiencing unexpectedly strong
gains. The MSCI Europe rose +7.4% month-over-month and
the MSCI AC Index increased +4.7%. In the U.S. and
Europe, Small Cap stocks outperformed Large Caps. The
Industrials sector was a top performer in both regions, and
with the exception of Telecommunications, all key sectors
were up in July. With respect to earnings season, at the time
of this writing, approximately 74% of S&P 500 companies
that have reported earnings exceeded estimates, slightly
above the historical trend.
Implied volatility was down among all asset classes, as
Figure 3 shows, reversing the substantial increases that
occurred in May and June. The S&P 500’s volatility fell
close to its lowest levels for the year during July (8.7%) due
to the bullish environment caused by the S&P’s positive
performance and investors’ optimistic outlook on the U.S.
economy. The decline in volatility was not limited to
equities, as interest rate volatility (as measured by the MOVE
Index) also declined. Consequently, cross asset correlations
were down in July.
Fixed income markets rose slightly on the month but, year-to-
date, are down nearly -5.0% as yields continue their upward
climb. Credits of lesser quality outperformed higher quality
credits in July and credit spreads (in both dollars and euros)
regained nearly half of the widening that began in May based
on fears of Fed tapering. The U.S. high yield spread over
Treasuries currently is 501 basis points and loan spreads over
Treasuries stand at 470 basis points.8
6
Hedge fund strategy returns are based on data supplied by Hedge Fund Research.
7
Reference is to the SPX Index, not the SPTR Index, as in Table 1.
8
J.P. Morgan North America High Yield and Leveraged Loan Research, Credit
Strategy Weekly Update, August 9, 2013, https://jpmm.com/research/content/GPS-
1188133-0.
Figure 3: Average implied volatility across five asset classes
Average of five asset classes (equities, FX, commodities, credit and rates)
Source: CFTC, J.P. Morgan Global Asset Allocation
Composite Hedge Fund Performance
Along with other risk assets, hedge funds experienced broad-
based gains in July, increasing +1.36% in reaction to robust
corporate earnings and a benign absence of macro risks. July
was therefore the strongest month for aggregate hedge fund
performance since January. Hedge funds have now delivered
positive performance in eight of the last nine months. All of
the major hedge fund strategies delivered positive
performance in July except for global macro, which declined
slightly (-0.11%).
Equity Hedge
Equity long short and market neutral strategies led hedge
fund performance, rising +2.5% in July on strong earnings
reports. Technology/Healthcare-focused funds experienced
robust gains (+4.04%), posting their strongest performance
since September 2010. Energy/Basic Materials-specific funds
(+3.67%) also rose substantially. July thus marked the best
performance for energy-focused equity funds in 18 months.
Fundamental value managers were up +3.3% on the month,
benefitting from exposure to the U.S. consumer, financial and
energy sectors. Exposure to European names also contributed
to strong performance among fundamental value funds.
10
15
20
25
30
35
40
Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13

3
Figure 4: Sector performance, July 2013
Source: Bloomberg, Standard & Poor’s
Event Driven
Event driven strategies posted aggregate gains of +1.54% in
July. Event driven managers have therefore delivered positive
aggregate performance in thirteen of the last fourteen months.
Activist and special situations managers contributed to July’s
gains, posting respective increases of +3.8% and +1.8%.
Popular event-focused names that have been in the news
include Sony, Dell, Herbalife, Air Products and
Publicis/Omnicom. Merger arbitrage managers reversed
June’s losses (-0.49%), posting month-over-month gains of
+1.0%.
Distressed strategies also posted solid gains in July (+1.4%)
benefitting from the tightening of spreads. As panic over Fed
tapering and interest rate shock subsided in July, high yield
credit tightened to below 5%. The historical trend9
with
respect to high grade spreads over Treasuries indicates that
high grade spreads should be just over 100 basis points, well
below the current 160 basis point spread.
Figure 5: USD high grade spreads over U.S. Treasuries
Basis points. Line denotes trend through cycle troughs.
Source: Bloomberg, J.P. Morgan Global Asset Allocation
9
J.P. Morgan Global Asset Allocation, Global Markets Outlook and Strategy, August 8,
2013, https://jpmm.com/research/content/GPS-1185674-0.
Relative Value
The environment in July was more benign for relative value
strategies than in June. Consequently, relative value
managers posted month-over-month aggregate gains of
+0.42%. Those gains were fueled largely by structured credit
and yield alternative strategies, which rose +0.84% and
+0.61%, respectively. After two months of less liquidity,
demand increased for structured products across residential
and commercial mortgage backed securities. Convertible
arbitrage managers also were up month-over-month
(+0.32%); convertibles managers with high U.S. exposure
were the best performers within this subset.
Global Macro
Global macro strategies were down slightly in July (-0.11%),
the third consecutive monthly decline. Managers with
commodities and currency exposure suffered losses on the
month as a result of which systematic managers, including
CTAs, were down -1.07%. Such losses were partially offset
by gains among discretionary macro managers with exposure
to energy and emerging markets, the latter of which had
experienced sharp aggregate losses (-4.00%) in June. Active
trading also partially offset the losses experienced among
systematic managers and CTAs.
7.09%
5.60% 5.51%
5.28% 5.14%
5.00%
4.20% 4.10% 3.88%
-0.74%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
0
100
200
300
400
500
600
Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08 Jan-13

4
Leverage and Risk Exposures
Gross Leverage
With equity markets edging higher in July, gross leverage for
all accounts in the Prime Brokerage portfolio increased from
1.81 to 1.84 (+1.4%) (See Figure 6). Gross leverage of
levered accounts in the Prime Brokerage portfolio rose from
2.41 to 2.54 (+5.7%) (See Figure 7). July was a slight
reversal of the recent downward trend in leverage but does
not necessarily reflect an increase in risk appetite, as it seems
to have been driven by clients adding short exposures despite
the market grinding higher.
Figure 6: Daily gross leverage and the S&P 500 Index
Source: Bloomberg, J.P. Morgan Prime Brokerage
Figure 7: Gross leverage (levered accounts) 5-day moving
average and the S&P 500 Index
Figure 8: Z-score of gross leverage and the S&P 500 Index
The Z-score measures how many standard deviations an observation is above or below
the mean
Gross Leverage by Strategy
Convertible Arbitrage and High Yield Fixed Income saw
notable increases in gross leverage month-over-month, rising
+5.5% and +5.4%, respectively. The only strategy to have
experienced a decrease in gross leverage in July was High
Grade Fixed Income (-8.0%).
Market Neutral, Equity Long Short, Convertible Arbitrage
and High Yield Fixed Income are running gross leverage
above their two-year averages. High Grade Fixed Income and
Multi-Strategy are running leverage below those levels.
Figure 9: Gross leverage by strategy
Source: J.P. Morgan Prime Brokerage
1.75
1.80
1.85
1.90
1.95
1,300
1,350
1,400
1,450
1,500
1,550
1,600
1,650
1,700
Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13
S&P 500 Index (LHS) Gross Leverage (RHS)
2.3
2.4
2.5
2.6
2.7
2.8
1,300
1,350
1,400
1,450
1,500
1,550
1,600
1,650
1,700
Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13
S&P 500 Index (LHS) Gross Leverage (Levered Account s - RHS)
-2.0
-1.0
0.0
1.0
Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13
Difference between gross leverage and S&P 500 Index Z-scores
0
1
2
3
4
5
Market Neutral Equity Long
Short
Multi-Strategy Convertible
Arbitrage
High Grade
Fixed Income
High Yield
Fixed Income
May-13 Jun-13 Jul-13

5
Table 2: Gross leverage by strategy
Average and first quartile calculated for the period of July 2011 to July 2013
Net Exposure and Net Leverage
Net exposure for equity-biased funds fell in July, declining
from 0.82 to 0.78 (-4.85%). Net leverage also declined,
falling from 0.69 to 0.66 (-3.97%). The month-over-month
decrease in net exposures may be attributable to clients
repositioning themselves in the wake of earnings season or
could simply be attributable to equity managers being
cautious by reducing longs/taking profits and increasing
macro protection.
Figure 10: Net exposure and net leverage
Equity Long Short and Market Neutral funds on the Prime Brokerage platform only.
LMV: Market value of long positions. SMV: Market value of short positions.
Eq: Equity in the clients’ accounts
Sector Exposures
The largest month-over-month increases in the long Prime
Brokerage portfolio were in the Financial (+0.7%) and
Consumer, Non-cyclical (+0.4%) sectors. The largest
declines were in Energy (-0.4%) and Communications (-
0.3%).
The largest increase in the Prime Brokerage short portfolio
was in Non sector-specific ETFs (+1.9%) due to increased
macro hedging. The most substantial decrease in short
exposure occurred in the Communications (-0.6%) sector due
to deal-related activity.
The Prime Brokerage portfolio may have become more
bullish on the Consumer, Non-cyclical sectors, which
experienced a month-over-month increase in long exposure
and decreases in short exposure.
Table 3: Long and short exposures by sector
Long (Short) exposure by sector as a percentage of total client long (short) exposure in
Prime Brokerage portfolio
Long exposure Short exposure
Jul-12 Jun-13 Jul-13 Jul-12 Jun-13 Jul-13
Basic Materials 5.2% 4.3% 4.4% 4.9% 5.1% 5.4%
Communications 11.7% 14.0% 13.7% 7.3% 6.4% 5.8%
Consumer, Cyclical 10.8% 11.6% 11.7% 9.3% 7.7% 8.1%
Consumer, Non-
cyclical
15.9% 16.1% 16.5% 10.3% 11.1% 11.0%
Diversified 0.2% 0.3% 0.4% 0.1% 0.0% 0.0%
Energy 7.8% 8.6% 8.2% 6.6% 7.2% 6.9%
Non sector-specific
ETF
3.5% 1.7% 1.9% 16.8% 17.5% 19.4%
Financial 19.1% 17.4% 18.1% 11.7% 9.0% 9.0%
Industrial 6.0% 6.8% 6.6% 5.8% 7.3% 7.3%
Technology 5.4% 5.1% 4.9% 5.2% 7.0% 6.7%
Utilities 1.7% 1.3% 1.3% 1.5% 1.7% 1.6%
Government 5.4% 7.4% 7.2% 10.9% 7.5% 6.8%
Other 7.2% 5.4% 5.1% 9.7% 12.4% 12.1%
May-13 Jun-13 Jul-13 Average
First
Quartile
% Change
Market Neutral 3.94 4.08 4.15 3.80 3.54 1.7%
Equity Long Short 1.96 1.97 1.99 1.82 1.72 1.1%
Multi-Strategy 1.74 1.72 1.73 1.76 1.73 0.9%
Convertible Arbitrage 3.57 3.62 3.81 3.68 3.49 5.5%
High Grade Fixed Income 1.82 2.08 1.92 2.48 2.24 -8.0%
High Yield Fixed Income 1.29 1.41 1.48 1.24 1.16 5.4%
PB Portfolio (Levered Accounts) 2.44 2.41 2.54 2.51 2.47 5.7%
0.4
0.7
1.0
Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13
Net Exposure (LMV/SMV)-1 Net Leverage (LMV-SMV)/Eq

Prime Brokerage Global Hedge Fund Trends – Securities Lending
6
North America Securities Lending
Equities
During July, securities lending activity in the U.S. Prime
Brokerage book reverted to the 2013 trend of strong net
covering. July’s reduction in short volume was concentrated
heavily in single name equities. Cumulative net activity
(shorts vs. covers) hit a 2013 low on July 18th. Although
there was increased shorting towards month end, the long
term trend of covering remained intact. Gross short volume
declined slightly on the month, though short volumes remain
above the 2013 average for the Prime Brokerage book. From
a sector perspective, covering was concentrated in
Communications, Financials and Energy, while the
Consumer, Cyclical and Technology sectors were net shorted
for the month.
ETFs
Along with single name equities, ETFs were net covered in
July. The largest covering occurred with respect to XLE
(Energy Select Sector SPDR ETF) and XOP (SPDR S&P Oil
& GaS Exploration & Production ETF). Country ETFs were
again active with improved liquidity and new shorting in
EEM (iShares MSCI Emerging Markets Index ETF), EWZ
(iShares MSCI Brazil Index ETF) and FXI (iShares FTSE/
Xinhua China 25 Index ETF). Fixed income ETF demand
subsided alongside covering in HYG (iShares iBoxx High
Yield Corp Bond ETF), JNK (SPDR Barclays Capital High
Yield Bond ETF) and LQD (iShares IBoxx Investment Grade
Corp Bond ETF). In contrast to the overall trend, there was
notable shorting in IWM (iShares Russell 2000 Value Index
ETF), SPY (SPDR S&P 500 ETF Trust) and XLF (Select
Sector Financial Select Sector SPDR ETF).
Event Driven
• AT&T Inc. (T) entered into an agreement to acquire
Leap Wireless International, Inc. (LEAP) for $1.2 billion
in cash. Leap shareholders will receive $15.00 in cash
and a contingent right to receive the net proceeds of the
sale of a portion of Leap’s spectrum in the Chicago
area. AT&T identified the added spectrum from the
acquisition as complementary to their existing coverage.
The transaction is subject to review by the FCC as well
as other customary closing conditions. Shares of both
AT&T and LEAP are currently general collateral (GC).
• Hecla Mining Co. (HL) completed its acquisition of
Aurizon Mines Ltd. (USA) (AZK) for $774 million in a
mix of stock and cash. Aurizon had rejected an
unsolicited offer from Alamos Gold in January and
subsequently commenced a search for an alternative
buyer.
• Loblaw Companies Ltd. (L CN) and Shoppers Drug
Mart Corp. (SC CN) announced an agreement whereby
Loblaw will acquire all Shoppers shares for a mix of
stock and cash. Shoppers shareholders will receive
consideration of 53.9% cash and 46.1% stock. Loblaw’s
controlling shareholder has entered into a voting
agreement in support of the transaction, which is
expected to close early next year. Borrow for Loblaw
spiked as high as -6% before settling at -2.5%.
• Halliburton Co. (HAL) announced a modified Dutch
auction to repurchase up to $3.3 billion worth of
shares. Halliburton shareholders may tender shares at a
price between $42.50 and $48.50. Halliburton ultimately
will determine the purchase price. The offer is set to
expire on August 22.
• After several bumps in the road, SoftBank Corp (9984
JP) completed its acquisition of Sprint Nextel Corp. (S).
The deal, valued at over $21 billion, is being touted by
management as creating a “stronger, more competitive”
Sprint.
Fixed Income
The Prime Brokerage fixed income book ended July net
shorted for the first time in six months. While overall
volumes increased, shorting was driven by corporate bond
activity. Although U.S. Treasury activity decreased for the
first time in three months, the on-the-run 10-Year remained
active, as did the short end of the Treasury curve, most
notably the Two- and Three-Year.
Increases in corporate activity were led by the Basic
Materials, Consumer, Non-cyclical, and Energy
sectors. Issues remain concentrated with continued interest in
the following names: Fortescue Metals Group Limited
(FMG), Cliffs Natural Resources Inc. (CLF), Alpha Natural
Resources Inc. (ANR), Arch Coal Inc. (ACI), Walter Energy,
Inc. (WLT), Dell Inc. (DELL) and BMC Software, Inc.
(BMC). Lam Research Corp. (LRCX), Priceline.com Inc.
(PCLN) and RadioShack Corp. (RSH) led increases in
convertible bond activity.

7
Figure 11: Cumulative net activity
Market value change of activity across equities, ETFs, and fixed income
Source: J.P. Morgan Securities Lending
Figure 12: Rolling 1-month daily short flow
Daily Activity Relative to 30-Day Average (LHS) and S&P 500 Index (RHS)
Source: Bloomberg, J.P. Morgan Securities Lending
Table 4: U.S. securities lending trends by sector
For the month of July 2013
5 Day 30 Day 90 Day
Price
Change
Position
Change
(shares)
Price
Change
Position
Change
(shares)
Price
Change
Position
Change
(shares)
Consumer, Non-cyclical 1.6% 0.3% 8.2% 1.9% 12.5% -5.2%
Financial -0.8% -0.5% 4.9% -7.4% 6.2% -9.7%
Technology 1.1% 1.4% 5.8% 2.3% 9.5% -8.2%
Energy 0.6% 0.1% 5.9% -1.2% 5.0% 8.1%
Communications 0.7% -2.3% 5.7% -4.2% 7.3% -5.2%
Industrial 0.3% -0.7% 5.7% -0.2% 7.3% 7.5%
Consumer, Cyclical 1.8% -0.5% 6.9% 1.0% 10.7% -2.4%
Basic Materials -1.7% 0.5% 4.3% 1.3% -2.9% -1.0%
Utilities 0.1% 5.7% 3.0% -0.6% -5.6% 22.5%
Table 5: U.S. securities lending trends by ETFs
For the month of July 2013
5 Day 30 Day 90 Day
Price
Change
Position
Change
(shares)
Price
Change
Position
Change
(shares)
Price
Change
Position
Change
(shares)
SPDR S&P 500 ETF TRUST 0.1% 0.6% 5.2% 0.6% 6.7% 13.2%
ISHARES RUSSELL 2000 0.1% 5.0% 6.8% 4.5% 11.4% 9.8%
ENERGY SELECT SECTOR
SPDR
-0.3% 2.9% 5.3% -26.1% 7.1% -5.2%
SPDR S&P MIDCAP 400 ETF 0.2% -4.2% 6.7% -6.9% 7.8% -30.3%
ISHARES MSCI EMERGING
MARKETS ETF
-1.8% -34.4% 0.6% 24.4% -8.5% 150.9%
ISHARES MSCI BRAZIL
CAPPED (EWZ)
-1.8% 6.3% -1.2% 49.6% -19.9% 178.9%
SPDR S&P OIL & GAS
EXPLORE & PROD. (ETF)
1.2% -4.6% 7.3% -16.8% 10.4% 3.7%
SPDR S&P RETAIL ETF 1.8% 38.7% 6.5% 98.4% 12.0% -5.1%
FINANCIAL SELECT
SECTOR SPDR
-0.7% 26.3% 5.6% 20.4% 10.8% 20.9%
POWERSHARES QQQ
TRUST, SERIES 1 (ETF)
1.8% -8.1% 6.6% -0.5% 8.7% 42.5%
-$16.0
-$14.0
-$12.0
-$10.0
-$8.0
-$6.0
-$4.0
-$2.0
$0.0
$2.0
$4.0
1-Aug 31-Aug 30-Sep 30-Oct 29-Nov 29-Dec 28-Jan 27-Feb 29-Mar 28-Apr 28-May 27-Jun 27-Jul
Equity ETF Fixed Income Net Activity
1,550
1,575
1,600
1,625
1,650
1,675
1,700
-200%
-150%
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
350%
01-Jul 08-Jul 15-Jul 22-Jul 29-Jul
Net Cover Activity (LHS) Net Short Activity (LHS) S&P 500 Index (RHS)

8
International Securities Lending
EMEA
Fundamental equity long short funds were busy with Q2
reporting season in full swing in July. The Prime Brokerage
portfolio saw significant increases in short interest in the
following names, giving rise to some of the most crowded
shorts in Europe: Banco de Sabadell (SAB: SM), Banca
Monte Dei Paschi Siena (BMPS: MI), New World Resources
(NWR: LN), K&S (KSC: ASE), Gemalto (GTO: EN),
Petropavlovsk (POG: LN) and Frontline Ltd. (FRO). The
Prime Brokerage book also saw significant interest across the
capital structure in K&S, Banca Monte Dei Paschi, Outotec
(OTE1V) and Caixabank (CABK), where hedge funds are
looking to short equities, bonds or convertible instruments to
express their directional views.
Securities lending interest continued for companies seeking
to raise capital or re-structure debt. There was increased
demand in Royal Imtech (IM: EN) as the rights traded and
borrow became highly illiquid. There are several more
companies deemed to have capital deficiencies which should
translate into an ongoing trend of capital raisings into the
second half of 2013.
Among convertible arbitrage clients, Alcatel Lucent (ALU
FP) continued to be a name of interest, although borrow
eased throughout July. There was strong interest in
International Consolidated Airlines (IAG LN) borrow as the
share price rallied and funds have re-hedged their
delta. Nokia (NOK) and Peugeot (UG) have also seen easing
in their borrow. Borrow for Emaar Properties (EMAAR) has
tightened, as clients have been building positions.
Asia Pacific Ex-Japan
Taiwan
July saw ongoing recalls from onshore brokers around
dividend dates. However, the impact on outstanding shorts
was limited, as increased offshore non-recallable supply
helped offset the recalls. Rates came off in HTC Corp. (2498
TT) as supply previously recalled for the dividend date
returned to the market, thereby adding liquidity. July also
saw increased shorting in the Technology sector.
Hong Kong
Demand for financial stocks continued. Minsheng Bank
(1988 HK) was the most heavily shorted name in the sector.
July saw continued two way flow in ETE (iShares
FTSE/Xinhua A50 China Tracker). There was also new
demand in the real estate sector for Evergande Real Estate
Group Limited (3333 HK).
Japan
The market in Japan was flat to down slightly (-0.7%) month-
over-month, which resulted in an overall decrease in borrow
demand. There was strong demand for SNS online-related
names, which generally are lacking in availability. The Prime
Brokerage book saw daily locates on Gree, Inc. (3632 JP),
DeNA Co. (2432 JP), GunHo Online Entertainment (3765
JP), Colopl (3668 JP), Altplus, Inc. (3672 JP), Klab, Inc.
(3656 JP), CROOZ (2138 JP), and Dwango (3715 JP).
Clients also sought locates in Yakult Honsha Co. (2267 JP),
Kenedix Residential Investment Corp. (3278 JP), and U-
SHIN Ltd. (6985 JP).
Australia
There was considerable activity among metals and mining
companies in Australia. Fortescue Metals Group (FMG AU)
experienced short covering as the iron ore price recovered
during July. There was also covering in Iluka Resources
Limited (ILU AU) as the Zircon spot price recovered. Rare
earth prices strengthened throughout July, but Lynas
Corporation Limited (LYC AU) shorts remained resolute
with borrow utilization increasing slightly to 97%. Demand
for Oz Minerals (OZL AU) increased after the company cut
its guidance on production for 2013 from 130-150 thousand
ounces of gold to 120-130 thousand ounces.
Treasury Wine Estates Limited (TWE AU) took a $160
million write-down as it attempted to address a glut of stock
in the United States, attracting moderate interest from short
sellers. APA Group (APA AU) bid for shares in Envestra
Ltd. (ENV AU), attracting limited demand from risk
arbitrageurs. However, the spread remains too expensive to
attract strong demand. Borrow utilization in McMillan
Shakespeare (MMS AU) doubled after tax changes affecting
auto leasing businesses were proposed by the Federal
Government. Demand for Macquarie Bank (MQG AU) fell
on company guidance for stronger profits this year.

Prime Brokerage Global Hedge Fund Trends – Institutional Investor Sentiment
9
Institutional Investor Sentiment
North America
During the month of July, the Capital Introduction Group
(CIG) held meetings with allocators in Michigan, Atlanta and
Montreal. The investor base in Michigan is concentrated
among a small number of large-scale pension plans,
endowments and foundations. The pension plans in
Michigan, which are related mainly to the automotive sector,
prefer to invest via funds of hedge funds (FoFs). To the
extent that the Michigan-based pensions invest with hedge
fund managers directly, they do so primarily with multi-
strategy funds with several billion dollars in assets under
management (AUM) for purposes of diversification. In
contrast to those pension plans, the Michigan-based
endowments and foundations tend to invest in hedge funds
directly. However, their portfolios have minimal turnover.
Accordingly, the amount of capital available for new hedge
fund allocations among such investors is limited. Few of
these groups use consultants for their allocations to
alternatives.
The institutional investor base in Atlanta is more diversified
and consists of public and private pension plans, consultants
as well as single- and multi-family offices. As in other
regions, most of those allocators are moving away from FoFs
in lieu of direct investments. While the bar remains high for
garnering new allocations, a number of family offices in and
around Atlanta are putting capital to work. Strategies of
interest include equity long short, European credit and
emerging managers.
Montreal’s investor base is comprised of several large
pensions and a handful of FoFs and endowments. Equity long
short with low net exposure is the strategy most in demand.
While some groups are willing to consider sector-specific
managers, most prefer generalist funds. Allocators also
expressed some interest in global macro.
Overall, it bears noting that, although numerous allocators
have in recent months expressed interest in directional
strategies such as equity long short, most of the new flows
have been limited to a select number of larger, established
managers. Industry flows were $14.5 billion in the second
quarter, the lowest level of the past five quarters.10
EMEA
CIG met with investors in Germany during July. Most
German allocators are in “wait and see” mode owing to
10
Hedge Fund Research Global Hedge Fund Industry Report, Second Quarter 2013.
pending regulations and upcoming elections. As is the case
with most European allocators, investors in Germany are
interested primarily in equity long short, though global macro
also is garnering increased interest. While there has been
speculation that corporate plans in Germany will migrate
increasingly to direct investments, most such investors still
use intermediaries, i.e., consultants and FoFs, for their hedge
fund allocations.
Asia Pacific
Equity long short remains the strategy of most interest among
Asia Pacific-based allocators. There has also been an uptick
in interest in Japanese equities. To date, most institutional
investors have sought exposure to Japan via global or pan-
Asian managers.
Allocators in Asia are beginning to turn away from structured
credit. Several groups are harvesting gains in the sector and
making redemptions. As usual, investors in Asia remain
interested in better-performing global macro managers and
uncorrelated strategies. Although CTAs are not experiencing
significant redemptions, investors are generally dissatisfied
with their underperformance and, therefore, not allocating
new capital.
Table 6: Investor strategies of interest by region11
North America EMEA Asia Pacific
Direction of
Interest
Level of
Interest
Direction of
Interest
Level of
Interest
Direction of
Interest
Level of
Interest
Convertible
Arbitrage
Neutral Neutral Neutral
Distressed Neutral Neutral Neutral
Equity Long
Short
Neutral Neutral Increasing
Event
Driven
Neutral Increasing Increasing
Macro Neutral Increasing Decreasing
CTA Decreasing Neutral Neutral
Market
Neutral
Neutral Neutral Increasing
Structured
Credit
Decreasing Neutral Decreasing
Legend
Low Interest
Medium Interest
High Interest
Source: J.P. Morgan Capital Introduction Group
11
This information comes from CIG conference calls and meetings with global hedge
fund managers and institutional investors. This table represents views of the CIG team
and may not be completely exhaustive.

Prime Brokerage Global Hedge Fund Trends – Market Perspectives
10
July Commentary
July was marked by a growing dichotomy between developed
markets (DMs), which overall delivered positive economic
news, and emerging markets (EMs) in which the outlook is
becoming increasingly dour. Economic news in the U.S. was
especially strong. The manufacturing PMI rose from 50.9 in
June to 55.4 in July, handily beating economists’ estimates
for a more incremental increase to 52.0. (A reading above 50
indicates that the manufacturing sector is expanding; a
reading below 50 indicates contraction.) Notably, all of the
major PMI sub-components increased as well. The New
Orders Index – an important leading indicator – surged from
51.9 to 58.3, which likely signifies that growth is
accelerating. Although U.S. consumer confidence edged
down slightly, the U.S. housing recovery continued apace in
July, with no sign of an end to house price appreciation.
Currently, home prices in the U.S. are increasing by double
digits and the inventory-to-sales ratio remains tight.
The landscape brightened in Europe where PMIs rose for a
third consecutive month. The Euro zone composite
manufacturing PMI advanced from 48.8 to 50.3, reflecting a
transition to growth. (Spain was the only country to see a
drop in manufacturing PMI in July.) This trend should help
corporate profits in the Euro zone expand in subsequent
quarters.
By contrast, the China PMI (compiled by HSBC) contracted
in July and EM growth – in both Asia and Latin America – is
slowing. The DM-EM dichotomy could widen further if the
Federal Reserve, reacting to continued U.S. expansion,
begins to slow its bond buying in September, as investors
will no longer see EMs as fruitful markets in which to
capture yield.
The following sections are excerpts from J.P. Morgan
Research publications. The full publications can be
accessed via the sources provided in the footnotes below.
Job gains to lag global growth lift 12
Through a prolonged period of sub-par growth, global
employment gains have continued at a solid pace. The
stability of employment growth over 2011-12 was an
important positive for a global economy absorbing negative
shocks. As the Euro area crisis weakened global demand and
weighed on confidence, labor market developments served as
12
J.P. Morgan Economic Research, Job gains to lag global growth lift, July 24, 2013,
https://jpmm.com/research/content/GPS-1171067-0.
a cushion. In addition, this resilience has limited the damage
done by periodic bouts of commodity price inflation that
dented household purchasing power. The importance of
sustained job growth is most evident in the resilience of retail
sales volume gains relative to other components of final
demand.
Consumers have, however, been standing on the back of a
corporate sector whose performance has been deteriorating.
Profit growth slowed alongside weaker GDP gains. This
slowdown has been magnified by a margin squeeze reflecting
a global productivity growth stall, a fall in finished goods
price inflation, and stable wage inflation. With persistent sub-
par growth and finished goods price inflation moving sharply
lower during 1H13, the pressure on corporates is building.
Capital spending gains have slowed in recent quarters, and
we believe that a corresponding adjustment in hiring is
looming.
Our forecast of a grind to higher global GDP growth is built
on the tension between corporate weakness, a building policy
impulse, and an improvement in credit conditions. The case
for this balance to deliver stronger overall global growth is
good. The implications for job growth are less clear. Indeed,
our forecast has all of the improvement in global GDP over
the coming quarters arising from a rebound in productivity
from the current stall. We expect global employment to rise
at a 1% pace between now and the end of 2014, in line with
its average over 2011-12.
The challenge of very low inflation in the Euro area13
For an extended period, Euro area core inflation (excluding
food, energy, alcohol, and tobacco) was surprisingly sticky. If
indirect taxes are also excluded, this measure of core inflation
averaged 1.5%oya for almost 18 months from the spring of
2011 to the late summer of 2012, not much below the 2%
peak seen in the spring of 2008, just before the first recession
began. A lot of economic weakness seemed to be delivering
very little disinflation.
But, the situation has changed significantly in the past nine
months, in two respects, in our view. First, the downward
momentum in area-wide core inflation has resumed. Euro
area core inflation ex. taxes fell from 1.5%oya last August to
1.1%oya in May this year. The stickiness of core inflation ex.
taxes appears to have been due to imported inflation and
13
J.P. Morgan Europe Economic Research & Fixed Income Strategy, The challenge of
very low inflation in the Euro area, July 9, 2013,
https://jpmm.com/research/content/GPS-1158342-0.

Prime Brokerage Global Hedge Fund Trends – Market Perspectives
11
second round effects of higher commodity prices. And
second, the impact of the diverging levels of slack across the
region can be increasingly seen in national inflation rates,
with core inflation ex. taxes reaching very low levels across
the periphery, with the exception of Italy. Deflation is already
well established in Greece, with the May reading of core
inflation ex. taxes at -1.5%oya. In Spain and Portugal, core
inflation ex. taxes in May was 0.9%oya and 0.7%oya,
respectively. Across the periphery, Italy stands out, with a
May reading of 1.6%oya.
In our view, core inflation ex. taxes in the region as a whole
will continue to decline; we expect it to fall below 1%.
Moreover, the dispersion of core inflation is likely to
increase. Core inflation ex. taxes is likely to rise in Germany,
and to continue falling sharply across the periphery. Indeed,
there is a good chance of deflation becoming entrenched in a
number of peripheral countries.
Daily Economic Briefing14
While some of the regional and sectoral details showed at
least some improvement, the latest quarterly IIF EM bank
survey was modestly negative on balance. The most notable
shifts in the survey, released yesterday, revealed worsening
funding conditions for EM banks, from sources both abroad
and domestically based. Additionally, EM banks reported
rising net non-performing loan expectations. Despite these
headwinds, however, the pace of credit tightening did not
pick up appreciably over the past three months. The moderate
rate of increase in EM bank credit standards has been fairly
constant since early 2012, weighing on GDP growth, which
fell to a non-recession decade low in 1H.
Our research has highlighted the direct linkages between the
Euro area crisis/recession and EM bank funding conditions.
Over the past few years, one way EMU banks responded to
increased stress was by reducing their exposure in the EM.
These periods of heightened stress were accompanied by a
widespread turn toward market risk aversion. EM banks
responded to these more restrictive conditions by raising
terms and standards on loans.
In the most recent quarter, the pace of Euro area credit
tightening slowed considerably while EM international
funding conditions deteriorated. Market jitters about the Fed,
which prompted a pullback in capital inflows to the EM,
were responsible. The same forces drove the adverse swing in
14
J.P. Morgan Economic Research, Daily Economic Briefing: EM funding conditions
deteriorate, July 25, 2013, https://jpmm.com/research/content/GPS-1172604-0.
EM domestic funding conditions. (In addition, there were
idiosyncratic developments such as the crunch in the
interbank market in China.)

Important Information and Disclaimers
12
This material (“Material”) is provided by J.P. Morgan’s Prime
Brokerage business for informational purposes only. It is not a
product of J.P. Morgan’s Research Departments. This Material
includes data and viewpoints from various departments and
businesses within JPMorgan Chase & Co., as well as from third
parties unaffiliated with JPMorgan Chase & Co. and its subsidiaries.
The generalized hedge fund and institutional investor information
presented in this Material, including trends referred to herein, are
not intended to be representative of the hedge fund and institutional
investor communities at large. This Material is provided directly to
professional and institutional investors and is not intended for nor
may it be provided to retail clients.
This Material has not been verified for accuracy or completeness by
JPMorgan Chase & Co. or by any of its subsidiaries, affiliates,
successors, assigns, agents, or by any of their respective officers,
directors, employees, agents or advisers (collectively, “JPMorgan”),
and JPMorgan does not guarantee this Material in any respect,
including but not limited to, its accuracy, completeness or
timeliness. Information for this Material was collected and compiled
during the stated timeframe, if applicable. Past performance is not a
guarantee of future results. JPMorgan has no obligation to update
any portion of this Material. This Material may not be relied upon as
definitive, and shall not form the basis of any decisions. It is the
user’s responsibility to independently confirm the information
presented in this Material, and to obtain any other information
deemed relevant to any decision made in connection with the
subject matter contained in this Material. Users of this Material are
encouraged to seek their own professional experts as they deem
appropriate including, but not limited to, tax, financial, legal,
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covered by this Material. JPMorgan makes no representations (and
to the extent permitted by law, all implied warranties and
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the US Employee Retirement Income Security Act of 1974, as
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as amended, no portion of this Material shall constitute, or be
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solicitation of an offer to buy or sell any securities or constitute
advice to buy or sell any security. This Material is not intended as
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or used as such. The Material should not be relied upon for
compliance.
An investment in a hedge fund is speculative and involves a high
degree of risk, which each investor must carefully consider. Returns
generated from an investment in a hedge fund may not adequately
compensate investors for the business and financial risks assumed.
An investor in hedge funds could lose all or a substantial amount of
its investment. While hedge funds are subject to market risks
common to other types of investments, including market volatility,
hedge funds employ certain trading techniques, such as the use of
leveraging and other speculative investment practices that may
increase the risk of investment loss. Other risks associated with
hedge fund investments include, but are not limited to, the fact that
hedge funds: can be highly illiquid; are not required to provide
periodic pricing or valuation information to investors; may involve
complex tax structures and delays in distributing important tax
information; are not subject to the same regulatory requirements as
mutual funds; often charge higher fees and the high fees may offset
the fund’s trading profits; may have a limited operating history; can
have performance that is volatile; may have a fund manager who has
total trading authority over the fund and the use of a single adviser
applying generally similar trading programs could mean a lack of
diversification, and consequentially, higher risk; may not have a
secondary market for an investor’s interest in the fund and none may
be expected to develop; may have restrictions on transferring
interests in the fund; and may affect a substantial portion of its
trades on foreign exchanges.
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Contact Us:
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