Fannie Mae and Freddie Mac have a friend on West 57th Street. That’s the New York address of Metacapital Management LP, the hedge fund founded by Deepak Narula.

The much-maligned mortgage aggregators were taken over by the federal government in 2008 and have since absorbed $140 billion in taxpayer bailout money. The head of the House Financial Services Committee wants to abolish them. Yet they still own or guarantee more than half of all U.S. housing loans -- and for that reason, the administration of President Barack Obama isn’t about to let them go belly up.

Narula, 49, has used Fannie and Freddie to build the world’s most-successful hedge fund. His Metacapital Mortgage Opportunities Fund, which invests heavily in agency mortgages, returned 37.8 percent in the first 10 months of 2012, putting it at the top of the Bloomberg Markets list of the 100 best- performing hedge funds managing $1 billion or more, which will be published in the February issue of Bloomberg Markets. That comes on top of a 23.6 percent return in 2011. The Mortgage Opportunities fund is up 520 percent since it started trading in July 2008.

Three of the top five funds in the Bloomberg Markets list invested in mortgage securities, and two of them are run by Minnetonka, Minn.-based Pine River Capital Management LP. Betting on mortgage securities outpaced every other strategy, with an average return of 20.2 percent, against an industry average of just 1.3 percent, according to data compiled by Bloomberg.

SAC Most Profitable
The most-profitable fund in the first 10 months of 2012 was Steve Cohen’s SAC Capital International, which earned $789.5 million for its managers. In November, the U.S. Securities and Exchange Commission notified Cohen’s $14 billion firm, Stamford, Connecticut-based SAC Capital Advisors LP, that it was considering suing it for civil fraud related to insider trading.

Narula’s edge in 2012 was in reading the tea leaves of Washington policy makers. Toward the end of 2011, government-backed mortgage securities dropped in value as Obama expanded programs to help owners refinance and bonds without insurance fell amid the euro crisis.

Narula took advantage. He later concluded that the Federal Reserve was going to help homeowners and bought bonds ahead of its September announcement that it would buy $40 billion a month of agency -- that is, Fannie-, Freddie- and Ginnie Mae-backed -- mortgage bonds.

Following the Fed
“To revive the housing market, the Fed has thrown a lot of firepower at agency mortgage-backed securities,” Narula says. “Policy makers have worked hard to let homeowners refinance. They’ve been clear that that’s their mission -- and you want to be careful going against that mission.”

In addition to his intuition on Washington policy moves, Narula uses mathematical models to calculate how long homeowners will make payments at their current interest rates before either refinancing or defaulting. The models predict behavior based on a homeowner’s credit score, address, loan size, loan age and other factors. The algorithms also allow sophisticated investors to hedge against wrong-way bets.

“You want to come up with wagers where if you’re right, you’ll do really well and if you are wrong, you don’t get hurt too badly,” Narula says.

No. 1 Metacapital is followed on the list by Steve Kuhn’s Pine River Fixed Income Fund, which also invests in mortgage bonds and returned 32.9 percent. Pine River captured No. 2 and No. 4 and tied for No. 19. That fund is run by portfolio manager Aaron Yeary. CQS Directional Opportunities, run by Michael Hintze’s London-based CQS U.K. LLP, was No. 3 and the top European fund. Crispin Odey’s London-based Odey European was second best in Europe, with a 24.1 percent return.

Coleman No. 12
Odey is a stock picker, as is Internet investor Chase Coleman, whose Tiger Global fund was No. 1 in 2011. It fell to No. 12 in 2012, with a 21 percent return. Coleman was the only protege of Julian Robertson, founder of Tiger Management LLC, to crack the top 20. “Tiger cub” Lee Ainslie of Maverick Capital Management saw his No. 31 Maverick fund gain 16.0 percent. Ainslie benefited from wagers on Apple Inc., which returned 47.6 percent as of Oct. 31.

David Tepper also made money on stocks. His Palomino fund, at 24 percent, ties for No. 6 in 2012; it was No. 1 in 2009.

The No. 1 midsize fund, with assets from $250 million to $1 billion, is Cheyne Total Return Credit, operated by London-based Cheyne Capital Management. It boasted a 61.4 percent return.

Hedge Underperformance
Those big gains came amid a fourth consecutive year of underperformance by hedge funds. The average return of 1.3 percent compared with a 14 percent gain, including dividends, for the Standard & Poor’s 500 Index through October.