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Justin Grant
Justin Grant
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Mortgage-Backed Securities Once Again A Good Bet for Hedge Funds, Asset Managers

With the U.S. housing market appearing to have turned the corner, along with the Fed planning to buy mortgage bonds every month, the outlook for mortgage-backed securities appears bright.

On the heels of recent news that unemployment is finally under 8 percent for the first time since the height of the global financial crisis, are signs that the U.S. housing market is making a comeback. And hedge funds that decided to bet on mortgage-backed securities are reaping the benefits.

The Financial Times reported today that hedge funds are earning more money from mortgage-backed securities than at any point since 2007, when bad bets on this asset class nearly sank the global banking system and set off the nastiest recession since the 1930s.

The paper noted that while the average hedge fund has earned about 4.6 percent this year, funds that bet on the mortgage-backed bond market in the U.S. have reaped far bigger gains.

From the FT:

Tilden Park, a $1bn hedge fund run by Goldman Sachs' former mortgage-backed securities team, was up 30 per cent as at the end of September, according to a client of the firm.

A $1bn mortgage-focused hedge fund at Pine River, run by another Goldman alumnus, Steve Kuhn, was up over 24 per cent for the year to the end of September. Pine River's $3.5bn flagship fixed income fund, which made similar bets in mortgages, was up nearly 29 per cent in the same period.

Obsidian, one of the flagship fixed income hedge funds run by asset management giant BlackRock, was up 25 per cent at the end of August, according to a client of the company.

Today's news that JPMorgan posted record profits on the strength of a surge in mortgage lending are another signal that the nation's housing market has finally turned the corner. As the damage from the London Whale trades continues to fade, the firm said it enjoyed 36 percent jump in mortgage lending revenue during the third quarter.

Meanwhile with the Federal Reserve looking to buy $40 billion worth of mortgage bonds every month until the jobs market is officially healthy, JPMorgan's outlook looks great over the near-term. But more importantly for hedge funds and other asset managers, mortgage-backed securities once again seem to be an asset class worth betting on.

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio
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