Ex-RBC, BofA Prop Traders to Start Mortgage Hedge Fund

Former Royal Bank of Canada and Bank of America Corp. proprietary traders plan to start a mortgage hedge fund at New York-based Tandem Global Management LP next month, joining at least half-a-dozen money managers wagering that home-loan bonds will rise in value.

Stuart Lippman, 40, chief investment officer of the Tandem Mortgage Opportunity Fund, was formerly a managing director and senior portfolio manager in the non-agency mortgage credit business of Royal Bank of Canada’s proprietary trading group, according to a presentation dated May 25 that was obtained by Bloomberg News. David Liu, 43, chief strategist and portfolio manager at the new fund, managed portfolios in the global proprietary trading group at Bank of America.

The fund would focus primarily on U.S. non-agency residential mortgage-backed securities, commercial mortgage-backed securities and asset-backed securities, Lippman said in a telephone interview. He and Liu plan to start the fund at the end of July with $100 million and raise as much as $500 million in 12 to 18 months.

Goldman Sachs Group Inc., Hayman Capital Management LP, Cerberus Capital Management LP and Canyon Partners LLC are among firms that have started or are seeking money for pools to invest in U.S. residential mortgages without government backing. Declining prices of such bonds in 2011 lured funds to invest in the market, which paid off this year as values soared after European regulators sought to stem the sovereign-debt crisis and the Federal Reserve was able to sell $19.2 billion of the notes, underscoring demand.

‘Excellent Opportunity’

The $1.1 trillion market for bonds tied to U.S. residential mortgages that lack guarantees from government-supported Fannie Mae and Freddie Mac or U.S.-owned Ginnie Mae gained 10.5 percent in the first five months of 2012 after losing 6.9 percent last year, according to Amherst Securities Group LP.

“We view the opportunity set for smaller-sized managers in the space as extremely interesting at the moment,” Lippman said. “Since the end of the first quarter the market has experienced some retracement and dislocation providing entrants with an excellent opportunity set across asset types.”

Before RBC, Lippman worked at UBS AG in the investment bank, where he built the secondary trading desk in both asset-backed securities and subprime mortgages, Tandem said in the presentation. Before that, he was a senior portfolio manager at Alliance Capital Management LP. Liu was head of mortgage credit research at UBS prior to his role at Bank of America. Before that, he was vice president of asset-backed securities research at Deutsche Bank AG.

Lippman and Liu are currently fundraising for the fund. Lippman declined to say how much in assets Tandem has firmwide. Tandem was founded in 2008 by Kevin Murphy, Joe Petri and James Tammaro. The firm also has an emerging markets fund run by Ruggero de’ Rossi, partner and chief investment officer, it said in the presentation.

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