Josh Birnbaum, the former Goldman Sachs Group Inc. trader instrumental in the bank’s bet against the U.S subprime mortgage market in 2007, posted a 30 percent gain this year in his hedge fund, according to a person familiar with the matter.
Tilden Park Capital Management LP, based in New York with $1.1 billion in assets, rose 6 percent in September, amid winning wagers on securities backed by the loans to borrowers with poor credit, said the person, who asked not to be identified because the fund is private. Steve Bruce, a spokesman for Tilden Park, declined to comment on the returns.
Brevan Howard Management LLP, D.E. Shaw & Co. and Angelo Gordon & Co. are among a growing number of funds that have started pools of capital this year to invest in mortgage securities that lack U.S. government backing. They have been lured to the almost $1 trillion non-agency mortgage bond market in part by property prices that are stabilizing after the biggest real estate crash since the 1930s. The entrants have only marginally diminished the number of opportunities, Birnbaum, 40, said in a telephone interview last week.
“There’s billions of dollars of bonds trading a week and they are hotly debated by people who trade them,” said Birnbaum, who declined to comment on his fund’s returns. “That produces an opportunity to make money in this space because valuation opinions are vastly different.”
Residential mortgage securities that lack U.S. government backing comprise the largest portion of Tilden Park’s portfolio, Birnbaum said. In addition, the fund trades mortgage debt supported by the government, commercial mortgage bonds and asset-backed securities. The fund also invests in equities, corporate credit, currencies, interest rates and volatility, which are primarily used for offsetting trades, or hedges.
Apart from a recovery in the real estate market, hedge funds have sought opportunities in mortgage bonds as projected yields exceed those for corporate debt even with record defaults priced in, and amid expectations that Europe’s banks will sell assets cheaply to bolster capital.
Housing is recovering as the Federal Reserve’s buying of government-backed mortgage securities and Europe’s debt crisis depress bond yields, driving U.S. home-loan rates to record lows. The market is also being bolstered by funds scooping up foreclosed properties to rent out.
U.S. home prices rose 1.2 percent in July from a year earlier, the biggest 12-month jump since August 2010, according to an S&P/Case-Shiller index that gauges property values in 20 metropolitan areas. The measure fell 35 percent from the peak in July 2006 to February 2012.
“Some of these recovery plays are compelling,” Birnbaum said. “When I think about the opportunity set in this market today, versus at the beginning of the year, I think it’s overly simplistic just to look at the rally in prices; you’ve got to look at marked improvements in the property markets and borrower behavior that account for much of the price gains.”
Tilden Park’s projections for housing are “significantly more constructive” now than they were a year ago, he said.
Birnbaum and Jeremy Primer, who had worked together at Goldman Sachs, founded Tilden Park in 2008. They began managing capital in 2010, after building the firm’s investment analytics and risk management. It employs 13 people and is named after a hilltop idyll of fragrant eucalyptus and bay laurel in Birnbaum’s native Berkeley, California.
In April 2010, the U.S. Senate Permanent Subcommittee on Investigations questioned Birnbaum, Goldman Sachs’s Chairman and Chief Executive Officer Lloyd C. Blankfein and five others who at the time were current and former employees of the bank, about their duty to clients and the ethics of betting against the housing market in 2007 as the bank sold mortgage-linked securities to customers.
The hearing happened 12 days after the Securities and Exchange Commission sued New York-based Goldman Sachs for fraud in a case that the firm settled for $550 million in July 2010. Birnbaum was not accused of wrongdoing.
The congressional panel in a later report described Birnbaum as “one of the chief architects of Goldman’s big short.” It quoted from an October 2007 internal presentation in which he wrote that the company’s bets were no longer “a hedge” by June of that year.
Birnbaum declined to comment on the hearing and report. Goldman Sachs has said its traders were acting as market makers and didn’t have an obligation to disclose their position to clients.