Mortgage hedge funds have hit the skids amidst speculation that the Federal Reserve is preparing to pare its bond-buying program.
"It's been a bloodbath the last four to six weeks," SkyBridge Capital's Troy Gayeski told Bloomberg News. "It was a confluence of just about everything."
Among the victims has been Metacapital Management, one of the best-performing hedge funds in recent years. The firm's $1.5 billion flagship had racked up 17 straight positive months—posting a 41% gain last year—until March, when it fell 0.1%. It fell a further 0.5% in April, which proved only a prelude to its 6.4% drop last month—the worst month since its debut in 2008.
"We miscalculated the market's response to the possible timing of the Fed's taper," Metacapital founder Deepak Narula wrote to clients on Monday. "The market response has been much more violent than we had anticipated."
Metacapital is not alone, however. Structured Portfolio Management's SPM Core Fund fell 5% in May, leaving it down 6.5% on the year. Midway Group's Market Neutral Fund dropped 2.9% in May, wiping out its year-to-date gains and leaving it down 2.2% in 2013. Guggenheim Partners's GS Gamma Advisors has also suffered losses.
Not everyone is suffering, however. LibreMax Capital rose 1% in May and is up 8.5% on the year. Pine River Capital Management's fixed-income strategy added 0.6% last month to hit 8.1% this year.
Even at Metacapital, there is room for some cheer. The firm's Mortgage Value Fund, which invests in more non-agency bonds than its flagship, is up 7% this year.