Elliott Management Corp., the $21 billion New York-based hedge fund founded by billionaire investor Paul Singer, sold residential mortgage-backed securities last quarter.
“While we acknowledge that the yield profile of many RMBS bonds compares favorably to other credit products, the absolute yields are very low,” Elliott said in a third-quarter letter to clients, a copy of which was obtained by Bloomberg News. “Even considering a likely continuation of good news in housing, we do not find most RMBS bonds compelling. As a result, we have continued to sell into this rally.”
Elliott differs from hedge funds including Brevan Howard Management LLP, D.E. Shaw & Co. and Angelo Gordon & Co. that have started pools of capital this year to invest in so-called non-agency home-loan bonds, which lack U.S. government backing. Those firms have been lured to the almost $1 trillion market in part by property prices that are stabilizing after the biggest real estate crash since the 1930s.
The market for non-agency home-loan bonds has shrunk by $1.3 trillion since 2007. Issuance of the debt peaked at $1.2 trillion in both 2005 and 2006 before collapsing as their prices tumbled amid soaring foreclosures and plunging home values.
U.S. home prices rose 2 percent in August from a year earlier, the biggest 12-month jump since July 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.
Elliott is still finding opportunities in commercial mortgage-backed securities, albeit at prices that aren’t as attractive as in the past, the firm said in the Oct. 26 letter.
“While instances of mispricing are fewer and less egregious, there are still enough of them for us to find opportunities,” Elliott said.
Demand for bonds linked to offices, skyscrapers and shopping malls is at about the highest in four years as commercial properties in the largest cities across the U.S. show signs of improvement. Angelo Gordon, LibreMax Capital LLC, Metacapital Management LLC and Brevan Howard are among firms that snapped up commercial mortgage-backed securities as confidence grows that the property is bottoming following the recovery in residential housing.
Elliott’s collateralized loan obligations, which pool high-yield, high-risk loans and slice them into securities of varying risk and return, gained during the quarter “as new investors continued to enter the sector,” the firm said. “Relative valuations remain attractive.”
JPMorgan Chase & Co. raised a $560.1 million CLO for Och-Ziff Capital Management Group LLC, the hedge fund run by Daniel Och, two people with knowledge of the deal said last month. Och said during a second-quarter conference call that the firm may build a CLO business. JPMorgan also raised a $617.3 million CLO for BlueMountain Capital Management LLC, two people with knowledge of the deal said in October.
CLO volume rose by $6.5 billion in September, the most since August 2007, bringing the total for the year to more than $31 billion, according to Morgan Stanley. While that’s up from $11.7 billion in all of 2011, it’s below the $91.1 billion at the height of the market in 2007, data compiled by Bloomberg and Morgan Stanley show.
The $13.4 billion Elliott International Ltd. fund rose 1.9 percent in September and 8.4 percent this year, according to an update to clients sent last month.
The firm declined to comment on the third-quarter letter.