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Mortgage-Backed and Asset-Backed Lending Hedge Fund Strategies on the Rise – April 2014

by Jesse Fahy

  • 24 Apr 2014
  • HF

Preqin’s Hedge Fund Analyst currently tracks 236 hedge funds with a core strategy focused in either asset-backed lending strategies or mortgage-backed strategies. According to Preqin data, these hedge funds achieved an average return of 12.05% in 2013, slightly outperforming the industry-wide average of 11.23% over the same time frame. This is a disappointment compared with 2012 when the average asset-backed lending strategies or mortgage-backed strategies hedge fund achieved more than double the returns of the average hedge fund, a feat that they are on course to achieve again this year as of 31 March 2014. 

The impressive record of returns has led to a steady growth in the prominence of both strategies in the hedge fund industry. Since 2008 an average of 23.5 new funds per year have started utilizing either asset-backed lending strategies or mortgage-backed strategies as a core strategy, peaking in 2012 with 29 new funds adopting one of the strategies. The growth in these two strategies has coincided with the financial crisis, or more importantly the credit crunch which followed; the increased difficulty of securing a traditional loan from banks provided the opportunity for these funds to fill the void. 

A look at the average fee structure for these funds shows a slight difference in the cost of investing in each strategy. While the average management fee for the two strategies are nearly identical at 1.48% and 1.49% respectively, asset-backed lending strategies prove to be a cost effective option when looking at its average performance fee of 17.71% compared to a 19.08% average performance fee for mortgage-backed strategies and an 18.98% average performance fee for hedge funds in general. The strategies have proven to be most prominent in the US, with 81% of all funds managed by US-based firms and just 13% being based in Europe. When looking instead at the geographical investment preferences of these firms, the North American dominance becomes a little less severe; only 26% of the funds invest solely in North America, with 51% having a global investment focus. 

Overall mortgage-backed and asset-backed lending strategies have proven to be a fast growing, attractive option in the hedge fund industry. The rise in prominence of these strategies worldwide can be attributed to the current favorable economic conditions that lend themselves to both strategies as well as their superior returns. The unique method of their returns, which leaves the strategies almost indifferent to market conditions, has added to the global appeal of these strategies and these funds should continue to satisfy the appetites of investors over the course of 2014.

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