Narula attributes his success to long years of studying the bond markets. The son of an Indian diplomat, he earned an engineering degree from the Indian Institute of Technology in Kanpur, one of the country’s top schools. His real interest, however, was finance, and in 1985, he enrolled at Columbia Business School in New York, where he earned a Ph.D. in management science while also studying finance. He then spent 11 years as a mortgage bond analyst and trader at Lehman Brothers Holdings Inc.

Narula started Metacapital in 2002 with $15 million from friends and his own savings. In that year, he gained 17 percent while the S&P 500 fell 23 percent. Investors came running.

Narula saw the danger in the market for subprime mortgages as early as 2005 and started shorting them. His fund suffered when valuations kept rising, and investors headed for the door. In 2006, Narula returned $500 million, and in 2007 he closed the fund.

“We had the right idea in shorting the subprime,” he says, waving his arm in the direction of his 12-member team sitting in front of computer terminals in his sparsely furnished Manhattan office. “If you are too early, you are wrong.”

Narula launched his Mortgage Opportunities Fund in 2008 and has thrived on buying and selling agency-backed mortgages while keeping a close eye on the Fed.

“The Fed’s mission is to drive down the 30-year mortgage rate,” Narula says.

China Connection
At Pine River, Steve Kuhn has taken advantage of his Chinese connection. The firm opened an office in Beijing in 2010 that employs a squad of 33 quantitative analysts and software developers.

Kuhn plays in markets where Narula has a smaller footprint. He buys and sells nonagency mortgage bonds -- that is, those not bought or backed by Fannie and Freddie. He uses several stratagems to hedge against a decline in their value.

To determine which securities to buy, Kuhn and his team analyze massive amounts of data on servicers and borrowers, from credit scores and loan age to ZIP codes and income.

Kuhn is now cutting his holdings in the subprime mortgage market. Narula, by contrast, thinks he can glean hefty returns from agency bonds for several more years.