NEW YORK (Reuters) – Hedge fund manager Greg Lippmann, the former Deutsche Bank trader who rose to Wall Street fame after a hefty and lucrative bet against subprime mortgages before the housing market collapsed, said he is still a fan of residential and commercial mortgage bonds going into 2014 and also likes student loan debt.
Lippmann told the Reuters Global Investment Outlook Summit on Tuesday his roughly $2.8 billion hedge fund LibreMax Capital has been “very active” in consumer asset-backed securities (ABS), particularly student loans but also credit card debt.
LibreMax rose 1.45 percent last month, according to a monthly note to investors reviewed by Reuters. The hedge fund, which invests not only in mortgage-backed securities (MBS)and ABS but also collateralized loan and debt obligations, has risen about 11 percent through October. The average hedge fund has gained about 7.7 percent this year, according to HFR, which tracks hedge fund performance.
Last year, Lippmann’s fund soared over 20 percent but he said the outsized returns achieved by structured credit specialists in 2012 were not likely to be repeated this year.
“It’s really dangerous to expect that great returns are the norm,” said Lippmann, referring to the average 19 percent gains that structured credit and mortgage-focused funds achieved last year. “The space can still generate attractive returns,” he said, but acknowledged the opportunity to invest in residential MBS “is not as good as it once was.”
Managers who invested in residential mortgage-backed securities (RMBS) throughout 2012 benefited mightily from last year’s search for yield as the Federal Reserve’s efforts to keep interest rates low pushed up the prices of mortgage securities.
Bonds backed by subprime mortgages performed especially well as a recovery in U.S. housing prices began to take hold.
Lippmann said going into 2014 he is “reasonably positive on housing, absent a substantial increase in interest rates,” although he does not see prices rising at the same pace as 2013.
He also continues to like student loan debt and residential mortgage-backed securities and commercial mortgage-backed securities (CMBS), he said, but did not give further details on specific investments.
Before he launched his hedge fund in 2010, Lippmann was a mortgage trader for Deutsche Bank who earned the bank over a billion dollars with a prescient call that the U.S. housing market was headed for disaster before the bubble burst in 2007.
While Lippmann said he is “alert for signs of shoddy underwriting and aggressive underwriting,” which was rampant in the lead-up to the housing collapse, at the moment there was so little underwriting in the RMBS market that the only market with potential for such a problem was CMBS.
Investors in non-agency mortgages have been waiting for the private label securitization market to open up again, as the existing pool of those bonds is shrinking fast.
“One of the issues is to get a non-government guarantee market back in place, and I don’t necessarily think selling Fannie and Freddie will change that,” Lippmann said, referring to a recent focus by large investors on loan guarantors Fannie Mae and Freddie Mac.
Last week, Bill Ackman’s Pershing Square hedge fund revealed it had stakes of almost 10 percent each in Freddie and Fannie, while Bruce Berkowitz of Fairholme Capital Management announced he and other investors were willing to buy and recapitalize the government-controlled mortgage insurers.
Lippmann said he doesn’t think the government will sell the two companies, which would require congressional approval. The White House and Congress have shown no interest so far in the plans proposed by private investors.
Lippmann’s fund recently took part in a noteworthy Fannie Mae transaction in which the insurer offered a security that passed on some of the mortgage default risk to private investors, following in the footsteps of Freddie Mac, which offered a similar product earlier in the year.
“Fannie Mae priced their first-risk sharing deal in mid-October, in which LibreMax participated. Both this transaction and the existing Freddie Mac deal traded much tighter over the course of the month,” the firm told investors in the monthly note.
Lippmann said he believes private-label mortgage securitization will come back in the next two years when there is greater clarity on the foreclosure process, home prices and eminent domain, which would allow governments to seize mortgages with negative equity to keep local residents in their homes.
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(For other news from Reuters Global Investment Outlook Summit, click here)
(Reporting by Katya Wachtel- Editing by Krista Hughes and Phil Berlowitz)
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