Dalton Launches High-Yield Mortgage Fund

May 5 2010 | 10:41am ET

Los Angeles-based Dalton Investments Management, a $1.1 billion Asian and global equities and distressed debt hedge fund firm, this month launched the Dalton High Yield Mortgage Fund.

The Cayman Islands-based master feeder fund was launched on May 1 with capital from the firm’s partners and their friends and family. Dalton will begin marketing the fund in Europe next month, according to a source familiar with the fund. 

The fund is looking to take advantage of the dislocation in the U.S. and global real estate markets by investing in residential mortgage backed securities. This is the firm’s second launch of an existing distressed strategy. The first fund, the Dalton Distressed Mortgage Fund, launched in June 2008 and is currently managing from $100 million in assets.

The source told FINalternatives that the fund invests in “orphaned securities,” which are traded in smaller volumes and are more complicated to analyze. “Their sizes are too small for larger funds to get involved in because they don’t make enough of an impact for those funds’ returns. If you look at higher grade, more liquid tranches of RMBS, they’ve really rallied a lot but the stuff Dalton is looking at has not rallied anywhere at all,” said the source.

According to the source, it’s going to take years before the market is able to clean up the current glut of distressed paper. “But once you get through that loans are going to come out of the woodwork. Right now, banks and insurance companies are not being asked to write down their loans, but when that happens, there might be opportunities in that market.”

The Dalton High Yield Mortgage Fund, which is managed by Todd Sherer, has a $1 million minimum investment requirement and sports a 1.5% management fee and a 20% incentive fee. It has a one-year lockup period.

In addition to this launch, Dalton may convert a Japanese REIT separately managed account into a fund later this year, according to the source.

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