For many Americans, the housing market is just starting to recover, but it’s been the hottest strategy for hedge funds all year long.
Hedge funds that invest in mortgage-backed securities gained 13.9 percent through November to make them the industry’s best-performing strategy, according to the Absolute Return index.
These top players did even better:
* Deepak Narula’s $1.4 billion Metacapital Management could be the top-performing hedge fund firm of the year. It gained 38 percent through November. Narula’s fund, which he launched in 2001 after leaving Lehman Brothers, largely invests in mortgage securities guaranteed by Fannie Mae and other agencies. Metacapital took off this year after the Obama administration made it easier for underwater homeowners to refinance those mortgages.
* The $11.2 billion Pine River is likely the biggest hedge-fund player in mortgages. Its $3.5 billion fixed-income fund, led by former Goldman Sachs mortgage exec Steve Kuhn, gained 34 percent through Dec. 21, after loading up on subprime mortgages at fire-sale prices late last year.
* Axonic Capital founder Clayton DeGiacinto, another Goldman mortgage vet who started his fund in 2009, said the new regulatory environment has driven his fund’s gains. The hedge fund of $1.5 billion Axonic, which invests in subprime and other risky mortgages, is up 25 percent.
* Former Deutsche Bank trader Greg Lippmann became famous for betting against the housing bubble. He launched LibreMax Capital in 2010 and now has $2.4 billion under management, having gained 19.68 percent this year through November. Lippmann’s views have come full circle. The biggest chunk of the portfolio, about 30 percent, is in subprime mortgages.
In fact, subprime mortgages — the risky securities that tanked the world financial system in 2008 — are so hot that they’ve outperformed Apple, one of the most widely held stocks.
One popular Markit ABX subprime index is up 48 percent this year, compared with a 27.6 percent gain for the iPhone maker.
Hedgies’ mortgage gains have been driven by new Dodd-Frank rules that have tied banks’ hands in trading, along with new capital requirements that forced them to unload mortgage-backed securities at distressed prices.
“The regulatory environment has shifted to where hedge funds can be in the catbird seat,” said Axonic’s DeGiacinto.
The recent uptick in housing, boosted by aggressive Fed action, is just icing on the cake. October home prices jumped 4.3 percent year over year, according to the Case-Shiller index.