Hedge funds hope for more mortgage juice

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Hedge funds & mortgage-backed securities

Hedge funds hope to squeeze more gains out of the real estate market despite increasingly muted returns.

Mortgage backed security-focused firms like Structured Portfolio Management, Metacapital Management and Candlewood Investment Group performed well in the third quarter, a snapback from rare losses during the second quarter. And despite lower expectations and even losses at some funds, investors added $1.68 billion to MBS funds over the third quarter, bringing the total of net inflows to the strategy to $5.10 billion for the year, according to hedge fund database eVestment.

"The outlook, in our opinion, for structured credit continues to be a positive one," David Sherr's One William Street Capital Management said in a recent letter to clients which noted opportunities in RMBS, CMBS and other non-housing asset-backed securities. After gaining 18.96 percent in 2012, the fund is up just 4 percent through September.

"We continue to expect increased volatility over the medium term especially if the Fed is in some kind of transition, and we do expect that we will have better opportunities to add exposures back at more attractive levels," the $3.06 billion firm added.