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Delivering Alpha: Tom Hill Made Good Call on Mortgages

Blackstone Alternative Asset Management CEO’s view that mortgage securities would come back has helped the firm outperform in the past year.

The best investment idea presented at last year’s Delivering Alpha conference by J. Tomilson Hill — mortgage-backed securities — proved to be a good one indeed.

Hill, CEO of Blackstone Alternative Asset Management, told the September 15, 2011 conference that residential mortgage-backed securities and nonperforming-loan investments had the best potential for risk-adjusted returns, because housing prices were going to stabilize towards the end of the year and in the first part of 2012, and soon turn upward.

Mortgage-backed securities rated AAA, which have the lowest risk of default, traded as low as $38 to $39 in October in the Markit ABX.HE subprime RMBS index, down from a high of about $62 in February. Since then, the securities have been steadily rising and reached a 52-week high of $53 as of July 10.

BAAM’s position on the housing market last year led the fund-of-funds to grow its mortgage exposure over the past 6 to 9 months. It now represents about one fifth to one third of Blackstone’s multistrategy and opportunistic funds, or $4.5 billion of the total $42.5 billion that BAAM manages.

Many hedge fund managers have taken the same view on the residential mortgage market in the past few months. Both large multistrategy or credit firms and small specialists have launched new funds dedicated to the sector, including Angelo, Gordon & Co., Hayman Capital Advisors, Cerberus Capital Management and CQS and Metacapital, among others. 

AR’s Mortgage Backed Securities index has also been one of the best performers this year, returning 7.06 percent year to date through the end of June, while the AR Composite index returned 2.58 percent in the same time period. The MBS index also performed better than the AR Composite index last year, returning 2.34 percent in 2011 compared to the Composite, which lost 0.79 percent.

Gideon Berger, Blackstone’s head of technology and risk management, says that mortgage strategies have helped multistrategy funds and indexes outperform by roughly 1000 basis points in recent months. “It has been very material to helping us outperform and be in the top quintile of providers,” Berger says. Blackstone’s overall Hedge Fund Solutions platform returned 1 percent last year and 4 percent in the first quarter of this year, according to the firm’s annual reports and Securities and Exchange Commission filings. The InvestHedge Composite index lost 4.26 percet last year and gained 2.56 percent in the first quarter of this year.

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