Mortgage hedge funds -- which had their best years in 2009, 2010 and 2011 -- have produced diminishing returns for two years in a row, according to Simplify LLC, a New York-based provider of hedge fund and private equity fund data.
Last year, just one of Simplify's six mortgage strategy sub-categories -- Residential Agency & Non Agency -- had better returns than in 2013, and that was by one percentage point. In 2012, all six of Simplify's mortgage strategy sub-categories returned 20 percent or more, compared with gains of 12 percent or more in 2013. Last year, just two categories -- Residential Agency & Non Agency and Distressed -- had double-digit returns.
"Many RMBS players will need to examine their investment thesis as the spread compression of the past few years looks to continue and further dampen returns," Simplify founder Brian Shapiro said in an e-mail. "However, with billions of dollars-worth of commercial real estate loan maturities set to hit the market, there are plenty of opportunities for CMBS managers."
CMBS funds were the best-returning mortgage strategies in 2013, when they gained 17 percent, according to Simplify. While CMBS strategies were the worst-performing mortgage sub-strategy the following year, the next few years should see a rebound, according to Shapiro. In 2016 and 2017, such strategies may produce consistent double-digit returns, he said.
This article is an exclusive sample from Bloomberg Brief Hedge Funds. Each week it publishes hedge fund launches, investments, strategies and performance data. Take a free 30 day trial.