Colorado-based hedge fund firm Deer Park Road Management plans to invest in the residential mortgage market in anticipation of the US Federal Reserve beginning to reduce interest rates later this year, according to CIO Scott Burg in an interview with Bloomberg.
Deer Park has accumulated $170m for its inaugural mortgage opportunity fund, which aims to profit from trades in legacy residential mortgage-backed securities that include loans originated in 2007 and earlier. Burg noted: “There’s a significant amount of equity in these homes, so the risk in these assets is minimised versus the potential returns growth, particularly in a declining rate environment.”
According to Burg, the fund is expected to close with approximately $200m in commitments in early July and offers a 12% hurdle rate with a three-year lock-in period.
Burg observed that investors are rapidly seizing opportunities and addressing dislocation in the real estate market, adding that acquiring legacy mortgages at a discount is an easily accessible opportunity. His remarks echo those of Blackstone’s President Jon Gray, who in March said that property values were reaching a low point, presenting an opportunity to purchase assets from banks and insurance funds that may need to sell at a discount.
The report notes that in the US, the acquisition of commercial mortgage-backed securities increased by 170% this year as of late April compared to the same period last year, indicating a renewed interest from investors.
Deer Park also plans to introduce a fund focusing on CMBS later this year or in early 2025, with the aim of raising up to $250m for the strategy, which offers an 8% hurdle rate.
Deer Park was established in 2003 by Michael Craig-Scheckman, an early employee of Izzy Englander’s Millennium Management, managing over $3bn in assets. The firm is recognised for its successful investments in significantly undervalued mortgage- and asset-backed securities following the 2008 financial crisis.
Its main hedge fund recorded a 23% loss last year, the largest since its inception in 2008, due to unsuccessful bets on a recession, having since eliminated its short positions and hedges that contributed to those losses. Burg added that the firm is now adopting a long-only strategy in anticipation of the Fed reducing rates later this year.
