Hedge fund says housing market may dip again

Date: Thursday, March 4, 2010
Author: Reuters

Hedge fund firm Pine River, which makes big bets on housing, is bracing for a double dip in that market, its chief executive officer said on Tuesday.

"There are still issues in the housing markets and it would not surprise us to see the recovery turn down," Brian Taylor, who founded the $1.6 billion hedge fund eight years ago, said at the Reuters Private Equity and Hedge Funds Summit in New York.

For Pine River, where Taylor and his seven partners work to identify relative value mispricings ahead of the curve, both a full-fledged recovery or a double-dip recession would provide a chance to make money for clients, Taylor said. "There is opportunity to profit either way."

Last year, Pine River gained about 90 percent, far more than the average hedge fund's roughly 20 percent return.

As Taylor sees it, the market for residential mortgage-backed securities turned from dull to exciting virtually overnight during the financial crisis, leaving his team with large opportunities that few others seek now.

"The amount of risk has never been greater," he said. "Armageddon was avoided in late 2008 and 2009," but the housing finance market is still awful, he said, with millions of homeowners sitting on liabilities that exceed their assets.

"Today there are still pockets of undervaluation left over from 2008," Taylor said.

Additionally Pine River is benefiting from a lack of competition thanks to the retreat of government-controlled mortgage buyers Freddie Mac (FRE.N) and Fannie Mae (FNM.N) from relative value investing in the RMBS market.