| Steve Kuhn (Photograph by Jin Lee/Bloomberg) |
Investing in mortgage-backed securities has become, almost by default, the most attractive strategy in the hedge fund industry. “I simply love the mortgage market. It’s the best place to be right now,” said Steve Kuhn, Pine River Capital Management’s head of fixed-income trading, speaking at the 2012 SALT Conference in May.
The $2.7 billion Pine River Fixed Income Fund, up 20.14 percent through July, has fallen in only four months since launching in September 2008. Donald Brownstein’s $3.4 billion SPM Structured Servicing Holdings Fund is up 13.24 percent for July and has suffered only two negative months since December 2008. According to AR data, hedge funds that employ an MBS strategy are up an average of 8.70 percent through mid-July. That beats all other strategies tracked and compares to a composite return of 3.27 percent. In total, hedge funds allocated at least $53 billion to the strategy.
The question is how long those lofty returns can last. Raphael Douady, co-founder and research director of Riskdata, a data firm that tracks hedge fund returns and evaluates risk, says MBS managers have relatively smoother returns either because they consistently apply a conservative methodology or are too optimistic in valuing their relatively illiquid positions. That creates seemingly low volatility relative to other hedge fund strategies, which can lull investors into a false sense of security.
Yet even if the best returns are gone and risks remain, it’s all relative for yield-hungry investors. “In such a low-yield world, many investors are happy with single-digit returns,” says Peter Duncan, head of credit research at $5.8 billion fund of funds Silver Creek Capital Management.
