“To buy into pools of those bonds at 80 to 90 cents on the dollar, we think that’s pretty attractive,” according to Teichholtz, who said Pine River is also putting on hedges against rising interest rates as part of the strategy.
Richard Eckert, an MLV & Co. analyst, sees many of the firms as good bets because they can earn higher yields on newly purchased bonds while the Fed continues to hold the cost of their short-term borrowing near zero and their shares trade below the net value of their assets.
Investors need to be careful because some may be taking too much risk with their leverage and liquidity, meaning they may fail to navigate any further bond volatility, he said.
“There still are some cowboys out there,” said Eckert, who declined to talk about specific companies as he prepared to publish research on the sector.
Brian Taylor, who spent 14 years at hedge fund EBF & Associates, founded Pine River in 2002, naming it after a Minnesota town close to where he has a lake house.
Regulatory Changes
The company decided to focus on mortgage investing after the dislocations created by the 2008 financial crisis and resulting changes driven partly by regulators and Wall Street risk managers. Banks scaled back trading desks and government- chartered Fannie Mae and Freddie Mac reduced their investment portfolios, Kuhn and Teichholtz said.
In 2012, Pine River’s fixed-income fund ranked No. 2 in a Bloomberg Markets magazine’s list of top-performing hedge funds overseeing at least $1 billion, as mortgage managers including Metacapital Management LP and Seer Capital Management LP outperformed all other strategies. Mortgage bets also helped the fund rank No. 7 in the magazine’s 2010 list.
Pine River’s hedge funds earlier this year increased exposure to equities, including financial companies, and corporate bonds. In the past year, the firm also built an energy-related equities team of six based in Pine River’s Austin office, which opened in February to attract investment talent and clients.
Fed Signals