New York-based Metacapital Management has launched a hedge fund to invest in residential and commercial mortgages. The Mortgage Opportunities Fund debuted in August and so far has beaten industry averages handily: The fund is up 11.25% through October, according to public databases.

The hedge fund invests predominantly in the U.S. residential and commercial mortgage-, asset-backed securities and related markets, including U.S. Treasuries, agency bonds, swaps and options, according to fund documents. It boasts two portfolios: a short-term trading portfolio, which consists of several diversified trades in the liquid sectors of the markets; and a long-term value portfolio, which expresses the firm’s views regarding prepayments, defaults, borrower behavior, liquidity and the impact of potential regulatory issues that may cause pricing inefficiencies.

For example, the long-term portfolio may hold discount mortgages that prepay faster than market expectations, and premium mortgages that prepay slower than market expectations. These holdings are then hedged with generic mortgage securities with average prepayments.
 
The Mortgage Opportunities fund charges a 2% management fee and a 20% incentive fee with a $1 million minimum investment requirement. It has quarterly redemptions and a one-year lockup provision.

Deepak Narula is the managing partner of the Metacapital, which he founded in 2001. Prior to founding Metacapital, Narula was a managing director and head of two mortgage-backed securities trading desks in the fixed income department at Lehman Brothers in New York from 1997 to 2000.