Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) were among Akanthos Capital Management’s top five positive contributors for 2013, even though common stock holders didn’t actually receive any dividends from the two government sponsored enterprises (GSE) this year. The hedge fund managed by Michael Kao was up 5.18% in the fourth quarter and maintained less than 20% average exposure to equities, getting most of its gains from idiosyncratic events, according to a letter to investors reviewed yb ValueWalk.

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Fannie, Freddie among top positive contributors

Fannie Mae and Freddie Mac preferred securities gained as much as 50% in the quarter as both companies continued to report profits,” the company said in a recent letter to investors.

Many funds have become interested in the GSEs over the last year as they have managed to repay the $187 billion government bailout they received during the crisis, which few expected at the time, and are doing well by any measure. The risk has always been political, because the current plan is to wind them down without sending a penny to shareholders.

“Political rhetoric appears to have shifted towards more of a compromise and showed an improved understanding of the issues,” Akanthos writes. “We believe this is a sea change in attitude from the politicians and effectively takes the zero recovery tail scenario off the table.”

The letter points to comments from Senator Corker and former Representative Barney Frank (who’s support could still be influential) about finding a settlement with preferred holders, taking a step back from their previous hardline stances that investors weren’t entitled to any compensation. This is a positive development for investors, but it is still striking Akanthos’ confidence in the outcome is striking. Otherwise it would be hard to justify listing stocks that could be actual zeroes as top contributors.

Akanthos listed WMI Holdings equity (WMIH), Career Education Corp. equity (CECO), Alcatel Lucent common stock (ALU), and General Motors warrants (GM/WS/B) as the other four main positive contributors to both fourth quarter and 2013 year-end returns.

Akanthos avoided equities despite losses

The top five negative contributors for 2013 were Equity hedges (SPY, IWM),  Credit hedges (IG index, Australia sovereign, CNP/UVV legacy positions), Gold options (GLD), Sanofi /Genzyme CVR (GCVRZ), and Chinese convertibles (STP, CMED).

Credit and equity hedges, along with gold calls, cost Akanthos 200 basis points of performance in the fourth quarter and 600 bp for 2013 overall. Even so, Akanthos kept its correlation with equities quite low.

“Unlike many other hedge funds that generated returns in excess of 30% this year by embracing market beta, we actually fought equity risk beta as well as credit risk beta every step of the way,” the company writes.

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