The list of funds who tumbled in May and have continued to under-perform in June is getting longer by the day. Credit focused funds, especially those who trade mortgage backed securities, experienced a time of high performance as the Federal Reserve took up a $85 billion/month bond purchase program out of  which $40 billion was dedicated to MBS purchases only. As the Fed continues to drop heavy hints that it will wind down the easing program as soon as the labor market improves, funds focused on such securities are in for a tough ride.

hedge funds

The billions injected into the market with QE have helped investors to profit from securities issued by mortgage lenders Fannie Mae, Freddie Mac and Ginnie Mae. Hedge funds who invested in MBS, ABS and RMBS returned in the range of 16 to 26 percent last year. MBS focused hedge funds populated last year’s best performing lists and we are expecting them to populate the lower end of monthly returns for the next couple of months.

Best MBS Funds Of 2012

Steve Kuhn’s Pine River Capital has several of its funds heavily invested in mortgage backed assets. Pine River Fixed Income was up 34.8 percent last year and is up 8 percent YTD after a +0.5 percent return in May. Pine River Liquid Mortgage, which invests in the same asset class, compounded a 28 percent return in 2012 and is down -1.6 percent YTD as of May 31.

Joining the list of underperformers is last year’s best performing hedge fund, MetaCapital Mortgage Opportunities, which was up 41 percent last year. Deepak Narula’s Metacapital lost 7.26 percent in May, wiping out its entire performance for the year. According to Reuters, the fund is now down 5.66 percent YTD to June 14.  Metacapital was seriously shaken by the sell off in mortgage backed securities in recent weeks. Metacapital Mortgage Value is up only 1.2 percent while Metacapital Rising Rates Fund  netted a zero percent gain to the end of May.

Another excellent performer was Marathon Asset Management’s, which  gained 24 percent last year in its $1.2 billion securitized credit portfolio.

Small Funds, Big Gains

A smaller Brazil-based hedge fund, BTG Pactual’s Distressed Mortgage Value Fund, gained a whopping 46 percent in 2012. Same goes for 400 Capital Credit Opportunities, which gained 34 percent in its $500 million portfolio. London based Chenavari Toro Capital IA wooed us with its 32.4 percent return in 2012, and has continued to perform well to May, gaining 14 percent YTD.

Credit Hedge Funds Stumble

Other than the above mentioned funds, credit focused hedge funds have already stumbled in the last couple of weeks. Bridgewater Associates’ All Weather Strategy is down 8 percent for the year after losing 6 percent in June, whereas BlueCrest Capital’s Bluetrend Fund lost 8 percent in May and is down 3 percent for the year to June 14.

We will be watching the June returns to see how much credit, especially securitized credit focused hedge funds, tumbled on their high roads.