SkyBridge Earning 38 Percent On Mortgage Bets

Bloomberg

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The U.S. mortgage market has been very good to Anthony "the Mooch" Scaramucci.

In the past few years, the Federal Reserve's unprecedented stimulus contributed to some of the biggest returns for money managers investing in mortgages. Then housing prices soared, lifting the most beaten-up home-loan securities. And Scaramucci's SkyBridge Capital, which invests $6.2 billion in hedge funds, was along for the ride. Mortgage investments fueled returns of about 38 percent over the past two years, about triple the industry average.

Even with SkyBridge now calling the stock market the best place to generate returns, its second biggest strategy is mortgages, which make up 38 percent of allocations, down from 70 percent a year ago, though still one of the highest for investors that farm out money to hedge funds. After benefiting as the Fed intervened in financial markets with low interest rates and bond buying, SkyBridge sees opportunities in government-backed mortgage debt during the retreat and is sticking with housing market wagers.

"We still like mortgage-backed securities," said Troy Gayeski, a partner at New York-based SkyBridge. Returns of 6 percent to 10 percent are likely from nongovernment backed debt as real estate continues to recover, he said, although the "violent move up in housing has already occurred."

The firm invests with managers such as Axonic Capital LLC, Seer Capital Management LP and Ellington Management Group LLC, returning more than 14 percent last year after gaining about 21 percent in 2012, according to regulatory filings and investor notices. The industry on average returned 7.4 percent in 2013 and 5 percent the prior year, according to the Bloomberg Hedge Funds Aggregate Index.

SkyBridge, founded in 2005 by Scaramucci, 50, got the biggest windfalls two years ago from managers who traded and invested in the $5.4 trillion market for government-backed agency mortgage securities such as Fannie Mae and Freddie Mac-guaranteed bonds. The following year, managers in the $800 billion non-agency market were the biggest winners in the mortgage market as house prices jumped by the most since 2006.

Last year, managers that trade U.S.-backed housing debt struggled as investors speculated the Fed would slow its debt purchases and concern grew that Obama administration policies and rising home prices would make it easier for certain homeowners to refinance, reducing the value of their investments. Gayeski said agency mortgage managers can now benefit from bets against the debt as the central bank retreats.

Rising Rates

The funds also can make about 10 percent to 15 percent annual income from bets on investments known as inverse interest-only notes, he said. Rising borrowing costs could lessen the impact of policies that enable wider refinancing, since it's less worthwhile for borrowers to replace their mortgages.

"As interest rates go materially higher, the political risk is less of a concern," he said.

The average rate for a 30-year fixed mortgage has risen to 4.41 percent from 3.35 percent in May, according to Freddie Mac.

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