Metacapital Extends Comeback as Hedge Fund Rises 10.6%

Metacapital Management LP’s largest hedge fund, which struggled last year after turning in the industry’s best performance in 2012, gained 2.4 percent in the third quarter to extend its comeback this year.

Deepak Narula’s $1.2 billion Metacapital Mortgage Opportunities Fund returned 10.6 percent in the first nine months of 2014, after advancing 0.5 percent in 2013, according to a quarterly letter sent to investors yesterday. Narula, who founded New York-based Metacapital, didn’t immediately respond to an e-mail today seeking comment.

Narula was buffeted last year by a slump in government-backed mortgage bonds amid anticipation of the Federal Reserve’s retreat from buying the debt. He is profiting this year as interest-only and inverse interest-only securities are gaining on reduced concern over homeowner refinancing. The notes offer no principal payment, meaning their cash flows are tied only to how long the debt remains outstanding. Narula said in the letter that while there’s still opportunity in those notes, they’re not all attractive.

“Securities backed by higher-rate loans can still tighten further especially if mortgage rates head higher,” he wrote. “On the other hand, an additional decline in rates may cause spreads to widen. Low-coupon IO is overvalued and has negative” spreads, he said.

Metacapital’s main fund gained 41 percent in 2012, when it topped Bloomberg Markets magazine’s list of the top performing managers overseeing more than $1 billion. Its struggles last year included a 7.3 percent decline in May 2013 amid four straight down months. The fund hasn’t had a monthly loss since June 2013.

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