Hedge fund reveals distressed mortgage appetite

Date: Wednesday, December 10, 2008
Author: Lee Jones, Money Marketing.co.uk

A US hedge fund has revealed that its main acquisition target is now distressed, under-valued mortgage debt.

In an interview with Reuters, T2 Partners founder Whitney Tilson revealed that the private equity firm had been “trimming” its equities book in an attempt to raise capital to buy “extremely attractive” distressed mortgage debt.

Tilson said: “Distressed debt returns are extremely attractive, rivalling returns from equities. For the first time in our history we are dabbling in this area.”

The hedge fund admitted between 10 per cent and 25 per cent of its capital was being invested in the bad mortgage debt to capitalise on the “huge cash flows” they are bringing into the group.

He added: “We are buying senior mortgage tranches at 30 cents in the dollar. We think it is going to make loses, almost certainly, but you can make enormous returns.”

Mortgage industry figures have expressed concerns over this practice. In last week’s Money Marketing former Edeus chief executive Michael Bolton accused such firms of making a “very quick buck” on such distressed mortgage backed securities.