(Bloomberg) — Hedge fund firm Deer Park Road Management Co. is set to pounce on beaten-down prices in the residential mortgage market on expectations that the US Federal Reserve will start lowering rates later this year.
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The Steamboat Springs, Colorado-based money manager, known for its wildly lucrative wagers on deeply discounted mortgage- and asset-backed securities in the wake of the 2008 financial crisis, has raised $170 million for its debut mortgage opportunity fund, the firm’s Chief Investment Officer Scott Burg said in an interview.
The fund will aim to capitalize on trades in legacy residential mortgage-backed securities with loans that were created in 2007 and earlier. “There’s a significant amount of equity in these homes, so the risk in these assets is minimized versus the potential returns growth, particularly in a declining rate environment,” Burg said.
Expected to close with around $200 million of commitments in early July, the fund offers a 12% hurdle rate with a three-year lock-in, Burg said.
“We see investors moving quickly to take advantage of the opportunities and dislocation in real estate,” he said, adding that buying up legacy mortgages on the cheap is “low hanging fruit.”
Some of the world’s biggest investors have been predicting a revival of real estate, with Blackstone Inc. President Jon Gray saying in March that values are bottoming and there’s an opportunity to buy assets from banks and insurance funds that may have to sell at discounts. In the US, the purchase of commercial mortgage-backed securities rose 170% this year as of late April from the same period a year earlier, signaling investors are warming to it once again.
Read more: Ellington Fund Mints 24% Return With Residential Mortgage Bet
Deer Park is also doubling down on its conviction that commercial mortgage loans will rebound and is planning to launch a fund focusing on CMBS later this year, or in early 2025. The fund is targeting as much as $250 million for the strategy that offers a 8% hurdle rate.
Founded in 2003 by Michael Craig-Scheckman, one of the first employees of Izzy Englander’s Millennium Management, Deer Park oversees more than $3 billion in assets. Its flagship hedge fund posted a 23% loss last year, the biggest since its 2008 debut, after placing bets on a recession that never came. It has since scrapped its short positions and hedges that contributed to those losses.
“We’re now long-only ahead of expectations that the Fed will lower rates later this year,” Burg said.
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