Hedge Funds Look South As Subprime In U.S. Sinks

Date: Monday, July 9, 2007
Author: Hedge Fund Daily

Suddenly mortgage-backed bonds in Mexico are looking better and better to foreign investors. “We’ve seen stronger interest in the Mexican market from some international investors now that we’ve seen adverse outcomes in the U.S. subprime market,” Luis Arce, chief financial officer of Christofferson, Robb and Co. told Reuters. (Credit Suisse Group predicts that investors in subprime mortgaged-backed bonds stand to lose $52 billion, while Deutsche Bank places the figure at up to $90 billion.) Reuters reports that until now hedge funds sniffed at the tiny Mexican mortgage markets, which has only $6 billion in outstanding mortgage-backed bonds, compared with $300 billion in its U.S. counterpart. The current state of the U.S. subprime market, however, has generated new interest south of the border as a booming population and a shortage of housing means lenders don’t have to turn to risky subprime in order to build business. As small as the Mexican market is now, economist Edward Skelton of the Federal Reserve Bank in Dallas, says it will double in each of the next three years, meaning it will have gone from basically zero in 2003 to $40 billion or more by 2010. Experts say hedge funds are likely to be increasingly aggressive getting into this market because they have more freedoms than other institutional investors.