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MKP Loses 4.8% as Lippmann’s LibreMax Joins Mortgage Slump

MKP Capital Management LLC’s $2.8 billion hedge fund, profitable every year since it was started more than a decade ago, lost 4.8 percent in the first half of 2011 as bonds tied to U.S. real-estate loans fell.

The credit fund dropped 1.03 percent in June, losing the most in commercial-mortgage-backed securities, according to a letter sent to investors by New York-based MKP and obtained by Bloomberg News. The hedge fund industry gained 4.4 percent through June, including a 0.2 percent decline last month, according to data compiled by Bloomberg.

LibreMax Capital LLC, CQS U.K. LLP and Seer Capital Management LP, which avoided losses from January through May, also fell last month as Europe’s sovereign-debt crisis deepened and as the Federal Reserve auctioned home-loan bonds. Hedge funds entered this year facing lower yields on mortgage investments after a jump in prices.

“We may get banged around a bit more, but pretty shortly fundamentals will prevail,” Philip Weingord, the former Deutsche Bank AG executive who started New York-based Seer Capital in 2008, said in a telephone interview. “We believe now is a decent entry point.”

Subprime-mortgage securities declined about 15 percent to 20 percent this year and there’s “little reason for weaker credits to rally,” JPMorgan Chase & Co. analysts led by John Sim in New York wrote in a July 22 report. The debt averaged gains of about 40 percent from mid-2009 through last year, according to Bank of America Merrill Lynch index data.

Annual Returns

MKP Capital, which oversees $4.5 billion, was co-founded in 1995 by ex-Salomon Brothers colleagues including Patrick McMahon and Maurice Perkins. Its credit fund has posted average annual returns of 11.7 percent since inception, ranging from 23.9 percent in 2007, when it profited from bets against mortgage debt as foreclosures soared, to 0.22 percent in 2008, according to the investor report.

Jason Weinzimer, a spokesman, declined to comment.

The fund helped push down mortgage-bond prices in March by dumping more than $2 billion of residential and commercial debt as the earthquake in Japan and conflict in the Middle East roiled debt markets, people familiar with the matter said at the time.

Greg Lippmann, the former Deutsche Bank trader who bet against subprime bonds before housing collapsed, posted a 2.6 percent loss in June for his $700 million LibreMax fund, a person familiar with the returns said. The fund, which gained 0.6 percent in March while MKP’s lost 6 percent, is now up 3.2 percent this year.

ABX Derivatives

Lippmann used contracts tied to derivative indexes to overcome declines in his mortgage-bond holdings in May, an investor letter said. The fund returned 10.3 percent from its inception in October through May. He declined to comment.

ABX derivative indexes tied to subprime loans are more expensive than the securities to which they’re tied after rallying in late June, the JPMorgan analysts wrote.

The indexes, which typically decline as the perceived value of the underlying debt drops, fell faster than the bonds earlier last quarter as dealers sought to hedge risk. They then outpaced the debt after Bank of America Corp. offered $8.5 billion for faulty loans and the Fed said June 30 it would suspend sales of bonds assumed in the rescue of American International Group Inc.

The performance of mortgage derivatives contributed to Goldman Sachs Group Inc.’s plunge in fixed-income revenue last quarter. The firm was “disappointed in the performance of certain businesses,” as earnings were dragged down by its mortgage-bond hedges, Chief Financial Officer David A. Viniar said on a July 19 conference call.

‘Mindful’ of Crisis

London-based CQS’s $1.6 billion asset-backed securities fund dropped 1 percent in June, as both U.S. and previously steady securitized European debt hurt returns, trimming 2011 gains to 3.55 percent, an investor letter shows. Alistair Lumsden, its chief investment officer for the debt, declined to comment.

The fund, which gained 19.2 percent last year and 72.8 percent in 2007 as it joined Lippmann in bets against subprime debt, said in the letter it ended last month “mindful” of Europe’s sovereign crisis and concerned a restructuring of Greece’s debt could roil markets. That tempered its optimism about the increase in its “overall opportunities,” Lumsden said in the letter.

Tricadia Losses

Seer’s hedge fund declined 1.42 percent in June, paring gains this year to 8.4 percent, according to an investor letter. The fund returned 24.9 percent in 2010. The firm, which oversees $428 million, was founded in 2008 by former Deutsche Bank executives including Weingord, the Frankfurt-based bank’s former head of global markets in the Americas.

Residential- and commercial-mortgage bonds helped drag Tricadia Capital Management LLC’s $2.2 billion Mariner-Tricadia Credit Strategies Fund to its second straight monthly loss in June, when it fell an estimated 0.33 percent, an investor report showed. The fund has gained 5.7 percent this year. Michael Barnes, a co-founder, didn’t return a telephone message seeking comment.

Some variation in performances reported by hedge funds invested in securitized debt may stem from differences in how they value their often illiquid or rarely traded holdings, according to Gene Phillips, a director at PF2 Securities Evaluations Inc., a consulting firm in New York.

“In our world, you can have major, major differences, depending on the pricing provider or method used,” he said.

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