Unstructured Finance

Although most investors have been pleased with the steadily rising U.S stock market over the past six months, funds that profit when markets are convulsing are licking their wounds.

With market stress at multi-year lows, volatility hedge funds returned just 1.16 percent in the first quarter, compared with 3.7 percent for the broader hedge fund group.

Some of the volatility specialists are doing better than others by capitalizing on major market moves in Japan, for example. And some are doing better simply because they are ‘short’ volatility funds – they tend to perform better when markets are calmer. But those funds are now few and far between.

“If I were to turn the clock back there were a lot more short volatility funds than long in 2004,” said Joshua Thimons, a portfolio manager at PIMCO. “There are fewer now – 2008 wiped most of the face of the map.” Short volatility funds earn a risk premium by selling volatility in the markets, capitalizing on the fact “that some managers use it as tail hedging,” he explained. “These funds have done better this year, but there are fewer of them.”

The problem the long volatility funds face right now– and long vol funds now make up the lion’s share of the strategy – is that, quite simply, there’s not a lot of volatility. Even the short volatility funds require some degree of movement in the market for there to be a relative value opportunity to exploit.

By Matthew Goldstein

It’s no secret that housing in the U.S. has become an investors market, especially if it’s an investor with cash to burn.

For more than a year now, we and just about everyone else in the financial media have been writing about how Wall Street-backed firms are looking to buy-up the wreckage of the housing bust on the cheap and rent out those homes until the time is right to sell them for a sweet profit. And it should come as no surprise that much of that buying is being done with cash because it’s the easiest way for an investor get a deal done quick.

Recent stats from the National Association of Realtors shows that 32 percent of all single family homes in the U.S. are being bought with that cash. But that’s not just foreclosures; it also includes homes listed by brokers. It’s a testament to how much money institutional investors like Blackstone and American Homes 4 Rent have been able to raise from high-net worth investors and others. all of whom are chasing yield in this low-yield world.

By Matthew Goldstein

Many cash-strapped, unemployed or underemployed people are still struggling with too much consumer and household debt. But there is one kind of debt that is getting smaller and smaller–mortgage bonds issued during the U.S. housing bubble by Wall Street banks and finance firms that isn’t guaranteed by either Fannie Mae of Freddie Mac.

The outstanding dollar value of  so-called private label residential mortgage bonds, or non-agency mortgage debt, is $909 million, according to stats compiled by CoreLogic and mutual fund firm Doubleline Capital. At its peak in July 2007, the total of private label mortgage debt was $2.2 trillion.

In July 2007, the financial crisis began in earnest as ever-so-late-to-game rating agencies began downgrading en massse a whole range of private label mortgage debt, much of which was backed by mortgages taken out by borrowers with either iffy credit histories or who put almost no money down for a home. As we all know the market for private mortgage debt shut-down and only now is beginning to show the first signs of coming to life–or green shoots as some might say.

By Katya Wachtel

Last year was a sorry one for the $2 trillion hedge fund industry, when funds lost 5 percent on average. This year managers are doing better, up more than 5 percent for the year, according to the latest tracking data.

But those returns are a far cry from the 16.4 percent rise achieved by the S&P 500 this year, so what will hedge fund managers – who are supposed to be the smartest, savviest market players on the Street – do to juice returns?

For now at least, they’re not levering up in the hunt for yield. Certainly, they’re not ratcheting up portfolios to the levels seen pre-Lehman implosion, when returns were bountiful, and hedge fund managers reported leverage of 3.4, on average.

By Matthew Goldstein

The FHFA continues to reveal as little as possible about its pilot project of selling foreclosed homes to private investors in bulk sales.

With surprisingly little fanfare, the Federal Housing Agency announced this week that Pacifica Companies, a little-known San Diego investment firm, is the first company to emerge as the winner in the pilot project. Pacifica is buying 699 single-family homes that are part of Fannie Mae’s REO portfolio in Florida.

In the coming weeks, FHFA says it will announce the winning bids for bulks sales of REO homes in California, Arizona and Illinois as part of the much-hyped pilot project to sell 2,500 foreclosed homes. The agency that regulates Fannie and Freddie Mac says there will be no winning bid for some 541 homes it was planning to sell in Atlanta. The agency didn’t offer an explanation.

A beautiful summer day in the New York area and the jinx is broken. What jinx, you ask? Well if you’re a long suffering Mets fan you know what I mean–finally a no-hitter. #LETSGOMETS! Oh and yes, here is Sam Forgione’s latest edition of weekend reads. Also don’t forget to follow Sam on Twitter @samuelforgione

From The Atlantic:

William D. Cohan challenges popular beliefs on the cause of the 2008 financial crisis.

From BusinessWeek:

ETFs are becoming increasingly risky to retail investors, Christopher Condon writes.

By Matthew Goldstein and Jennifer Ablan

Phil Angelides, the former chairman of the commission set up by Congress to look into the causes of the financial crisis, is no longer part of a group seeking to turn a profit by investing in distressed mortgages.

A representative for Angelides emailed a statement to Reuters saying the former California state treasurer stepped down as executive chairman of the upstart firm, Mortgage Resolution Partners, on Jan. 27. Angelides, as we reported today, stepped down about two weeks after our exclusive story about his role with the firm was published by Reuters.

Angelides’ role sparked controversy because the firm touted its political connections as part of its “secret formula” for negotiating deals to buy distressed mortgages.

By Jennifer Ablan and Matthew Goldstein

The last place you’d think a group of Wall Street financiers and ex-politicians would convene to come up with a master plan for fixing the housing crisis is a luxury lodge overlooking the Golden Gate Bridge. But in November, during the height of the Occupy Wall Street protests, that’s where 30 rich and powerful people assembled to “do a good thing” for America.

The meeting at Cavallo Point in Sausalito, Calif., aimed to “hammer out a business plan and chart a course through 2012″ for an investment vehicle that intends to buy up troubled mortgages and help out the homeowners all the while making a 20 percent annual return. You can read the details here

The group is led by Phil Angelides, the California politician, land developer and most recently, the chairman of a federal commission who led investigations into why the financial markets collapsed. The Federal Crisis Inquiry Commission was criticized for failing to come up with any real proposals preventing another crisis. Yet it seems to have inspired Angelides (his tenure at the FCIC ended last February) and others to come up with a market-based solution to the housing debacle.

By Matthew Goldstein

There was plenty of theatrics Thursday when Jon Corzine returned to his old stomping ground–Capitol Hill–to offer an apology and a mild defense for the events that led to the collapse of MF Global. But in the end little light was shed on just what happened during those final days of October, as Corzine’s firm spiraled towards bankruptcy and hundreds of millions dollars of supposedly protected customer money went missing.

Corzine said many times he didn’t know what happened to the money and was shocked as anyone to find out the money was gone. But there is one thing Corzine said that will prove to be the most critical part of his testimony and that’s his assertion that he never intended to do anything wrong. Or more precisely, he never intended to have customer money maintained in segregated accounts transferred to the firm’s own bank accounts.

As anyone who has been following the MF Global saga now knows, the one inviolate rule of the futures industry is that a firm cannot commingle its money with its customers, or take customer money in a segregated account to pay the firm’s bills or debts.

By Matthew Goldstein

So riddle me this: How did we go from blaming “banksters” for all our financial ills to now casting teachers, cops and firefighters as overpaid government slackers who are keeping an economic recovery from picking up steam?

Somewhere, somehow, the narrative of the worst financial crisis since the Great Depression changed. Not too long ago, all the talk was about exotic securities backed by crappy mortgages, inadequate bank regulation, excessive CEO pay and burdensome consumer debt. Now the conversation in Washington and Wall Street is more focused on overly generous pensions for public employees and the levels of government spending on the poor, for education, new roads and middle class health benefits.

This isn’t too say that runaway government deficits aren’t a problem that need to be addressed–most likely with a combination of tax hikes and spending cuts. But the financial crisis didn’t begin in summer 2007 with concern about government spending.