A play on the sub-prime bust

Posted by: Dean Foust on February 16, 2007

I mention this not to offer investment advice, nor to shill for this firm (I, for one, wouldn’t invest in 99% of hedge funds out there, given their lack of transparency and lack of investment history). I cite this only as the latest phenomenon in post-modern real estate: Lahde Capital, a hedge fund located in Santa Monica, recently opened three new funds – U.S. Residential Real Estate Hedge I, II and V – that are designed to profit from the presumably impending collapse in the sub-prime market. The funds will all employ similar strategies: Taking short positions in the riskiest tranches of sub-prime mortgage securitizations. The only differentiation is that the funds use different levels of leverage, with fund “V” maxing out at five times leverage. (Credit to FINalternatives for spotting this development.)

Fund manager Andrew Lahde was quoted by FINalternatives as saying that the conditions that led to the massive buildup of the sub-prime mortgage market have “all reversed,” so much so that it’s nigh impossible to even underwrite sub-prime mortgages anymore. Ladhe believes that increased delinquencies and foreclosures will hammer the lowest-rated tranches of mortgage-backed securities. “The riskiest pieces of these securitizations can be wiped out entirely in a situation that is even moderately different from the goldilocks environment we have lived in for the past six years,” Lahde told FINalternatives. Just like all those speculators now swaming in to buy foreclosed properties, there’s a ton of money out there that’s been waiting for this moment, to profit from the downside of the housing bubble.

 

About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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