JP Morgan’s Expensive Misstep: The London Whale

JP Morgan Chase recently reached a $150 million settlement with shareholders over the infamous “London Whale” trading scandal. This adds yet another layer to an already costly episode: the bank lost $6.2 billion on the trades themselves, paid $920 million in fines to U.S. and U.K. regulators, and now owes shareholders and their attorneys an additional $150 million.

The irony? All of these payouts come directly from the pockets of JP Morgan’s shareholders—the very group being compensated. It’s a full-circle moment in the worst way, and a reminder that when institutions stumble, it’s often investors who end up footing the bill.

Accredited Investor Rules: Due for an Update

The SEC is (finally) considering changes to the definition of an “accredited investor.” For those unfamiliar, this designation currently applies to individuals earning at least $200,000 annually or possessing $1 million in net worth (excluding their primary residence). Accredited investors gain access to private investment opportunities that aren’t available to the general public.

The logic behind this rule is debatable. Essentially, it assumes that people with more money are either better equipped to absorb losses—or more financially savvy and less likely to make poor decisions. Neither assumption holds up well in reality. Wealth doesn’t automatically equal wisdom, and high-net-worth individuals can and do make costly investment mistakes.

One of the more compelling proposals on the table is a test-based accreditation system. In other words, instead of just qualifying by income or net worth, investors would need to demonstrate a baseline understanding of complex investments. It’s a move that could bring some much-needed rationality to the process.

BlueCrest Bows Out—Unless You’re on the Inside

Hedge fund BlueCrest Capital Management recently announced it would return all outside investor money and focus exclusively on managing the wealth of founder Michael Platt and internal staff. This isn’t a radical change—they had already been running an internal fund in parallel—but the performance gap is telling.

The public-facing BlueCrest International fund posted unimpressive results:

• Down 0.17% early this year

• Up just 0.1% in 2014

• Down 1.56% in 2013

Meanwhile, their internal BSMA fund, which doesn’t charge the usual “2 and 20” fees, reportedly returned around 60% over three years. Unsurprisingly, BlueCrest declined to comment.

The takeaway? Many in the investment world believe that when managing your own money, you optimize for returns. When managing others’ money, you often optimize for fees. Bloomberg columnist Matt Levine summed it up perfectly:

“Strategy 1 is, like, buy stuff that will go up. Strategy 2… implies that you should scale up your fund and raise your fees until you have captured for yourself all of the alpha that you can generate.”

In other words, when you’re good at making money, make sure you benefit from it first—and let others chase what’s left.

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