Wall Street fat cats, who since 2009 have been pocketing billions of dollars in profits off the backs of beleaguered homeowners and their delinquent mortgages, could be facing the end of the party, a recent report shows.
From an average gain of 45 percent in 2009, the performance of hedge funds that invest in mortgage-backed securities fell to 9.4 percent in 2014 and to less than 1 percent in the first two months of 2015, according to Brian Shapiro, whose hedge fund research firm Simplify has analyzed some 83 funds that own about $50 billion in such securities — from residential to commercial.
The downturn for the mortgage-backed securities funds signifies a healthier economy and real estate market.
“Real estate values have gone through the roof in some places, and borrower risk is also way down,” said Shapiro. There is less distress, which is “not so good for hedge funds that preyed on the collapse,” he said.
Moreover, the recovery is no longer dramatically skewed to the top 1 percent but has broadened to the lower income levels due to labor market and wage gains, said Troy Gayeski of SkyBridge Capital, which invests in hedge funds.
The collapse in energy prices is also helping those people make ends meet, he said.
“Even if fundamentals stay attractive, there is no mathematical way” the funds are going to make “mid-teens or more returns,” said Gayeski.
Most of the funds would probably do “marginally” worse this year than last, earning about 2 percentage points less, he said.
As a result, SkyBridge has sliced its investments in hedge funds that invest in mortgage-backed securities by half since 2012.
Over time, however, some of the funds have done remarkably well.
Deepak Narula’s Metacapital Mortgage Opportunities Master Fund tops the charts, with an annualized return of 36 percent over 77 months, according to Simplify’s research.
Other top names include Jeff Tannenbaum’s Fir Tree, whose Mortgage Opportunity Fund annualized 34 percent over 61 months, and Steve Feinberg’s Cerberus CMBS Opportunities Fund, up 28 percent annually over 81 months.
The best long-term record is held by Don Brownstein’s Structured Servicing Holdings Master Fund, which has an annualized record of 25 percent over 204 months.