Metacapital Jumps 28% In First Half On Mortgage Bets

Jul 30 2010 | 1:02pm ET

Hedge fund Metacapital Management soared 28% in the first half, with half of that return coming during the second quarter, the worst for the hedge fund industry in a decade.

The $150 million New York-based firm profited from government-backed debt in the first six months of the year, founder Deepak Narula wrote to investors. The firm, which debuted in 2008 with Narula, a former mortgage-bond trader at Lehman Brothers, at the helm, posted an eye-popping 125% return last year, Bloomberg News reports.

Now, however, the firm is girding itself for a potential “one-time amnesty” term change by Fannie Mae and Freddie Mac, which could save homeowners a whopping $50 billion a year through refinancing. The “only losers” in such a scenario “are the security holders of mortgages that are paying above-market interest rates,” Narula wrote.

To protect itself from such a refinancing wave, Narula said that Metacapital was buying lower-coupon mortgage bonds to hedge its bets on the inverse interest-only tranches of collateralized mortgage obligations that earned the firm its big returns in the second quarter.


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