Hedge funds jump into subprime paper
- Last Updated: 2:16 PM, June 11, 2012
- Posted: 11:09 PM, June 8, 2012
The smart money, having already shorted the euro, hoarded gold and loaded up on Apple stock, is now placing large bets on the housing sector.
Five years after the US housing market started to melt, at least several hedge funds have decided that the bottom is near and the Fed is on their side so they are moving back into the residential mortgage-backed securities market in a big way.
“Given where the housing market is and the prices today, they’re very attractive vis-a-vis any other fixed income asset on the planet,” said Troy Gayeski, a portfolio manager at Anthony Scaramucci’s SkyBridge Capital, a fund-of-funds that is invested in a number of these hedge funds.
Over the past year, about 15-to-20 new hedge funds have been launched to focus on residential mortgage-backed securities. Others are ramping up investments.
Many are looking at the risky subprime paper that cratered the US financial system. The big players are:
* Steve Feinberg’s Cerberus Capital Management, which has the biggest new residential mortgage-backed securities fund and hit the $1 billion mark recently.;
* Hayman Capital’s Kyle Bass, whose fame and fortune was made by shorting subprime, and started a dedicated mortgage-backed fund late last year;
* Goldman Sachs Asset Management;
* Major multi-strategy funds like Och-Ziff Capital Management, Soros Fund Management and D.E. Shaw;
* Dedicated firms including Pine River Capital Management, Metacapital Management, One William Street and Axonic Capital.
“Mortgage-backed securities have basically trounced the other hedge fund strategies,” said one well-known portfolio manager who has been running a dedicated mortgage-backed hedge fund for years.
Some funds have annualized returns of 50 percent, he said.
Through April, the AR Mortgage-Backed Securities Index gained 5.37 percent, one of the best performing hedge fund indices. Moreover, the mortgage funds avoided May’s market woes, according to managers.
Yet, the real estate market could fall another 3 percent to 7 percent, Gayeski admitted.
The most popular vintage of AAA subprime bonds trades around 40 to 50 cents on the dollar, yielding between 9 percent and 12 percent. With interest rates near zero, those are mouth-watering returns. And even if 80 percent of these loans default, as many expect, investors say they can still profit.
Residential mortgage-backed securities tumbled last year, however, on European woes and a massive load the Fed dumped into the market. But they’ve been coming back in 2012, and the consensus is that the market has stabilized — a word also used by Fed Chairman Ben Bernanke this week to describe the state of housing.
Market participants are also counting on the Fed bolstering the market by buying mortgage-backed securities when it engages in further quantitative easing.
“It’s a very big market; there’s lots of opportunity,” said Deepak Narula, whose Metacapital runs more than $1 billion in mortgage-backed securities hedge funds, including a recently launched one.