CQS U.K. LLP, the $11.2 billion money-management firm founded by Michael Hintze, is starting a hedge fund to trade mortgage-backed securities after the value of the assets tumbled last year.
The CQS ABS Alpha Fund started with $140 million this month, and investors have pledged additional capital to bring the fund to $200 million by April, according to a Feb. 2 letter sent to clients and obtained by Bloomberg News. CQS is limiting additional investments in the fund because “further inflows will be contingent on market opportunity,” the letter said.
Some categories of U.S. mortgage bonds that lack government backing fell more than 30 percent in 2011, as America’s economy struggled, and investors concerned about contagion spreading from Europe’s debt crisis sold assets. The securities have recouped some of the losses in the past two months as buyers attracted by low prices moved in.
Money managers such as Minnetonka, Minnesota-based Pine River Capital Management LP, which invests most of its $5 billion of assets in hedge funds, say the decline in prices means bonds tied to the most-default prone U.S. home loans offer yields of more than 10 percent -- even if almost all of the borrowers default.
CQS restricted clients from adding money to a bigger asset-backed security hedge fund last May after the size of the pool climbed to $2 billion. The CQS ABS Fund, managed by Alistair Lumsden, has gained 29.3 percent a year on average since the firm started it in 2006.
The latest CQS hedge fund, which Lumsden will also oversee, plans to use more leverage to boost returns, according to the letter to clients. The pool will make more concentrated investments in less liquid securities, and positions won’t be as hedged as the bigger CQS ABS Fund, according to the letter.
A CQS spokesman declined to comment on the new fund. Hintze started the firm in 1999 and it now has about 230 employees globally.
Clients of the ABS Alpha fund will be penalized if they withdraw their money in the fund’s first year, according to the letter. They will also only be allowed to redeem 25 percent of their investment in a given quarter, the firm said.