Last year, Dan Loeb’s gains of over $500 million from Greek government bonds and Boaz Weinstein’s returns from betting against the London Whale were perhaps the largest moneymakers. While we have heard of stellar paper returns from many hedge funds in 2013, huge profits have not actually been reported yet. Another big profit maker from 2012 unearthed by WSJ’s Gregory Zuckerman is that Och-Ziff Capital Management Group LLC (NYSE:OZM) reported $2 billion in profits from investments in structured credit initiated in 2012. On an initial capital of $7.5 billion, Och-Ziff roped in a brilliant 26 percent in profits, before fees.
Och-Ziff’s profits through a single strategy exceeds those reported by any other asset manager or hedge fund in 2012. We might as well say that as far as our information is concerned this is the largest gain reported by Wall Street’s hedge funds. The firm’s 14 member credit team, headed by James Levin, made timely bets in residential mortgage-backed securities and collateral-based loan obligations which paid off handsomely. The investments were boosted by a rally seen in the housing sector in the US. The best part for Levin’s credit team was that his profits of $2 billion made up more than 50 percent of Och-Ziff’s total trading profits of 2012, approaching $3.4 billion.
As banks have decreased their presence in structured credit investments, hedge funds now have the opportunity to invest even more of their assets in mortgage backed securities and related investments. More and more hedge funds have profited from this area, including Seth Klarman’s Baupost group and Jeff Gundlach’s DoubleLine Capital, while others like Paul Singer’s Elliott Capital have dialed back their positions because of the considerable risks that come with these trades.
James Levin’s huge bets in credit space were mostly unhedged, which made them all the more risky. Even now about a fourth of Och-Ziff’s $33 billion assets under management are held in structured credit investments. Och-Ziff Capital Management Group LLC (NYSE:OZM) has a large, risky bet that the sector will continue to rally in this year as well.