July 2 (Bloomberg) -- Money managers including TCW Group Inc. and Harding Advisory LLC that topped the list of firms behind the most toxic mortgage securities have raised more than $4.3 billion to invest in home-loan debt.

At least half of the 20 top managers of collateralized debt obligations tied to subprime-mortgage securities have funds seeking to profit from home loans. They are targeting twice what they've already raised, data compiled by Bloomberg show.

``CDO managers may be seen as guys who created garbage and now want more money to sort out their own junk,'' said Roy Smith, a former Goldman Sachs Group Inc. partner who now teaches finance at New York University's Stern School of Business.

Issuance of CDOs more than doubled from 2000 to 2005, outpacing the 9.6 percent annual growth rate of U.S. corporate bonds, and then accelerated through mid-2007. That was before record home foreclosures marred mortgage-linked securities, causing some AAA-rated CDOs to lose all their value.

The CDO managers, who join more than 80 competitors now targeting distressed mortgage assets, tout their experience, relationships and databases to pension funds and wealthy individuals. They include firms such as Cohen & Co., GSC Group and Harding, as well as TCW, the former Trust Company of the West now owned by Paris-based Societe Generale SA, and BlackRock Inc., the largest publicly traded U.S. fund manager.

Joseph Patterson, president of Patterson Capital Corp., the Los Angeles-based bond fund manager founded in 1977, said it's surprising that a CDO manager can maintain a reputation for being a ``wonderful mortgage manager.''

`Events of Default'

Bankers and managers create CDOs by bundling together assets such as mortgage bonds, buyout loans or preferred shares, with income from those holdings used to repay investors. Issuance of mortgage-tied CDOs jumped to $227 billion last year before plunging to less than $1 billion this year, according to JPMorgan Chase & Co. data.

So-called events of default have occurred on $217 billion of mortgage-bond CDOs since October, indicating even their senior-most investors probably won't be repaid in full and other classes may be erased, according to data compiled by Charlotte, North Carolina-based Wachovia Corp.

``Despite what's been said about CDOs, having a background with the securities is a positive,'' said Munish Sood, president of Princeton Advisory Group, the 12th-largest manager of CDOs composed of mortgage bonds in 2007 according to Standard & Poor's. ``We have experience managing the underlying mortgage assets, which is where we are seeing the opportunities.''

Ivy Lane

A $490 million Princeton Advisory CDO called Ivy Lane has had more than 85 percent of its collateral downgraded, according to Wachovia data. The CDO, underwritten in 2006 by Citigroup Inc., is making payments only to holders of its senior-most classes, Wachovia says.

TCW, the largest manager of CDOs composed of mortgage bonds, and BlackRock, the fifth largest, have raised at least $3.6 billion for mortgage opportunity funds. That doesn't include a $3.75 billion BlackRock fund that bought debt from UBS AG. New York-based BlackRock also manages $30 billion of Bear Stearns Cos. assets for the Federal Reserve and JPMorgan Chase.

``This is the best time that we've ever been in to add value to a portfolio,'' BlackRock President Robert Kapito said in a speech last month. Kapito, BlackRock spokesman Brian Beades and Michael Utley, a spokesman for Societe Generale's Los Angeles-based TCW unit, declined to comment their CDO businesses.

Harding, Cohen

New York-based Harding Advisory, the CDO specialist founded by President Wing Chau that last year hired Merrill Lynch & Co. executive Kenneth Margolis, has raised $75 million for a fund that hopes to collect $500 million, Hedge Fund Alert reported last month. Chau, who together with Margolis has committed to invest as much as $10 million, declined to comment.

Opportunity fund managers tell investors that they won't be able to withdraw their money for several years because of uncertainty about when markets will recover or their holdings will pay off. The Princeton ABS Distressed Fund carries a ``three-year investment period,'' a marketing letter says.

Philadelphia-based Cohen, headed by former Merrill Lynch structured-products chief Chris Ricciardi, has raised about $100 million for a planned $1 billion fund, Hedge Fund Alert reported in June. The company is the sixth-largest manager of mortgage- tied CDOs.

Drexel Survivors

Mortgage specialists including Cohen's Frederick Horton compare the current round of fundraising to the aftermath of the collapse of Drexel Burnham Lambert Inc. Bankers tainted by working at Drexel, or funds that bought ``junk'' corporate-bonds from it, proved worth betting on after the debt helped cause hundreds of U.S. savings and loans to collapse in the 1980s. Leon Black, Drexel's former chief of mergers, later founded Apollo Management LP. He acquired big stakes in many of the companies Drexel had helped finance by buying their junk bonds from failed thrifts.

Junk, or non-investment-grade, company bonds returned a record 39 percent in 1991, the year after Michael Milken's Drexel filed for bankruptcy, Merrill Lynch index data show.

``The guys who were most successful at making money in that cycle were former Drexel guys or former high-yield managers,'' Horton, a senior managing director at Cohen, said in a telephone interview last month. ``The same thing will happen here, I think.''

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net; Jonathan Keehner in New York at jkeehner@bloomberg.net

Last Updated: July 2, 2008 00:01 EDT