JPMorgan Chase & Co. said in June that it would redeem $9 billion of TrUPs after the Fed proposed rules to implement the Collins amendment. Citigroup Inc. announced the same month that it would buy back trust-preferred securities paying yields in excess of 8 percent, reducing the bank’s Tier 1 capital by $4.9 billion. Regulators view Tier 1 as the most important for loss absorption because it combines equity with retained earnings.

Yield-hungry investors have recently bid up TruPS, said Tetyevsky, who’s followed the hybrid securities market for more than 10 years. The rebound has been a boon for EJF, which bought the hybrids when they were cheap, an investor in the fund said.

“Traditional fixed-income buyers really abstained from investing in these instruments, because they can go up like a bond and go down like equity,” Tetyevsky said. “There is also more volatility and less liquidity in certain TruPs than in other investments, which at times requires the use of equity puts and credit-default swaps to hedge risk. It’s ideal for a lot of hedge funds.”

Dilution Bet

EJF has bought TruPS issued by lenders including Bank of America Corp., Bank of New York Mellon Corp. and M&T Bank Corp., according to investors who asked not to be identified because the information is private. The fund’s strategies included predicting which banks would take advantage of relatively good financial health to redeem their hybrid securities after the Collins amendment, and arbitraging instances in which there are price discrepancies between assets issued by the same lender in different currencies.

A typical trade involved buying Keycorp TruPS that would be affected by the Collins amendment and betting against the Cleveland-based bank’s shares on expectations that the lender would have to fill its new capital hole by selling stock, thus diluting existing equity holders, investors said.

Friedman has also profited from the U.S. government’s exit from programs it set up to save banks during the credit crisis, investors said.

TARP, Europe

The U.S. Treasury has been selling bank securities it received in exchange for rescue loans made under the Troubled Asset Relief Program. Making money through the anonymous government auctions, as Friedman has, requires being able to quickly analyze the health of banks in municipalities like Eden Prairie, Minnesota, and Cordova, Tennessee.

“When it comes to the banks and the financials, he knows them better than anyone,” said Jim Sullivan, who worked at FBR during the late 1990s and now runs a Washington-based investment firm, Sullivan Wood Capital Management LLC. “If he sees a value in something, something he thinks is attractive, he’s going to scoop it up.”