Non-performing residential loans have great potential for low-risk gains, and hedge-fund manager Deepak Narula is putting together a big bet on the thesis.
"The banks are going to be shedding these assets because they have high capital requirements, and it's really not an 'asset' for them," he said Thursday from the SALT Conference in Las Vegas. "And so, it is one of the few areas in the marketplace where security valuations have gone up a lot but loan valuations are still depressed, despite having gone up."
On CNBC's "Fast Money" Narula said that the strategy focuses on buying loans at "significant discount" to the underlying real estate.
That provides leeway to ensure returns, he added.
"And you see if you can cut the homeowner's balance, you can cut the homeowner's interest rate, to a level where the monthly payments are such that they can afford to live in the home," he said
Narula, who is a managing partner at Meta Capital, oversees $1.9 billion in assets. The fund focusing on non-performing residential loans has not yet opened to outside investors.
An increase in home prices, if it happens, would provide a "big benefit," he added.
"But where current market valuations are, you can buy these loans between 60 and 70 percent of what the home is worth," he said. "So, you don't need home-price appreciation for this strategy to be profitable."