It's still not exactly clear how JPMorgan was hedging.
Most assume that it had a variety of positions on CDSs linked to the CDX.NA.IG.9, which tracks credit default swaps on about 127 investment-grade companies in North America. The main bet was that credits generally would maintain their quality and then-current level of default risk. But presumably it was long and short the index, as it sought to hedge some original hedges–and ended racking up the billion in paper losses.
The other side of some of the main trades were taken by hedge funds, some of which are willing to hold onto their bets, convinced they have some upside left. According to Reuters, some fund managers, including some who used to work for JPMorgan, "started betting in credit derivative markets, including on an index of credit default swaps against its constituents, during the first quarter, believing JPMorgan's huge positions had created dislocations in the market which would disappear over time."
If the credit hedge funds are correct, then we're looking at more paper losses for JPMorgan Chase. The billion loss could easily turn into much more. Equity hedge funds, however, may realize some losses thanks to the decline in the JPMorgan stock. TheStreet.com suggests that some hedge funds might have snapped up shares after first quarter profits were announced, though we will not know for sure for a while. One bank that snapped up some banks stocks dodged the bullet: David Tepper's Appaloosa Management bought up Citigroup shares and avoided JPMorgan.
- here's the Reuters article