Pine River’s Kuhn Sees ‘Golden Age’ for Mortgage Hedge Funds

Hedge funds that trade mortgage bonds are benefiting from less competition from Wall Street trading desks and the portfolios of government-supported Fannie Mae and Freddie Mac, Pine River Capital Management LP’s Steve Kuhn said.

More “mistakes” are developing in the relative prices between different securities as regulators rein in investment banks’ proprietary trading and the two mortgage finance companies’ ability to capitalize on their cheap funding, said Kuhn today in an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle.

“These were the policemen that kept prices in line,” said Kuhn, the head of fixed-income trading at Minnetonka, Minnesota- based Pine River who manages a hedge fund that’s gained 32 percent this year. “It’s the golden age of the relative value hedge fund.”

Hedge funds focusing on mortgages, which Kuhn said are also benefiting by poaching talented employees from Wall Street dealers, returned 20.2 percent through October this year, according to data compiled by Bloomberg. That compares with an average of 2.6 percent for all hedge funds and a 12.3 percent rise in the Standard & Poor’s 500 (SPX) index of stocks in the period.

Mortgage bond returns have outpaced those of other assets as the U.S. housing market rebounded, homeowner refinancing remained constrained after real estate’s slump since 2006 and the Federal Reserve expanded its purchases of government-backed debt, reducing yields.

Returns on senior-ranked, subprime securities from 2005 through 2007, the years that produced the most defaults, average 39 percent this year, according to Barclays Plc index data. The debt lost 5.5 percent last year.

A year ago, Kuhn described the bonds as “cheap” in a Bloomberg Television interview.

While the opportunity is “certainly not as good as it was last year,” Pine River expects it can make more than 10 percent on the debt next year, he said today.

To contact the reporters on this story: Jody Shenn in New York at; or Erik Schatzker in New York at; or Stephanie Ruhle in New York at

To contact the editor responsible for this story: Alan Goldstein at

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