02.21.2014
By Terry Flanagan

Hedge Fund Challenges Mortgage Giants

Mortgage-backed securities occupies its own space within the fixed-income universe, and the fairly esoteric business is suited for a hedge fund with bench strength. New York-based hedge fund Goldstein Capital Corp. has worked its strategy for more than 18 years, deploying insightful analysis and prudent leverage of Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities (MBS).

“We’re high-quality bond managers,” said Paul Goldstein, founder of the eponymous firm. “On the taxable side our specialty is mortgage-backed securities. We also work with municipal bonds.”

The firm manages a market-neutral hedge fund strategy that leverages mortgage-backed securities. The firm also manages more traditional long-only separately managed accounts, as well as performs sub advisory for other investment advisors that farm out the fixed home income portion of their clients’ assets to separately managed accounts.

Paul Goldstein, Goldstein Capital Corp.

Paul Goldstein, Goldstein Capital Corp.

“We’re levered mortgage players in our hedge fund and our hedge strategy separate accounts, and I think we’re a very interesting alternative to the mortgage REITs that a lot of people really want what we do, but don’t understand the difference,” Goldstein said.

The firm had a deep focus and expertise on managing risk in a bond portfolio and in generating alpha in a bond portfolio. That carries right over to its traditional unlevered separate accounts.
“The reason a lot of the investment advisors that we work with like us is we’re very good at managing the swings in the value of a bond account,” Goldstein said. “This is important at a time when all of their clients are concerned about what rising interest rates might do their client’s bond portfolios.”

In mortgage backed securities, a fundamental force is that there’s a fear about rising interest rates which has carried over to mortgage backed securities, municipal bonds, and a whole variety of bonds.

“I’d say that’s a common core across all bonds portfolios,” said Goldstein. “In mortgage-backed securities, I think the interesting thing that’s going on is the government’s continued quantitative easing where they’re continuing to buy mortgage backed-securities.”

The Federal Reserve has indeed lent substantial support to the MBS market over the past few years as part of a broad program of quantitative easing. Janet Yellen, the still-new Fed chair, has said she supports continued ‘tapering’ of the monthly purchases of MBS and Treasuries, which is widely seen as the first step of a longer-term plan to return to a more normalized rate environment.

Prior to founding Goldstein Capital, Goldstein spent 10 years as an institutional bond salesman at Kidder Peabody, after receiving an MBA and an engineering degree.

“One interesting idea that might pique a lot of people’s interest is the similarities as well the differences you find when you compare our hedge fund strategy to a lot of the mortgage REITs – such as the Annalys of the world,” said Goldstein. “A very fundamental difference in that we have a primary focus of market neutrality and they allege to hedge. What you see is that each of us is leveraging government agency mortgage backed securities.”

Annaly Capital Management, one of the nation’s largest public REITs, raised eyebrows this month when it announced in a regulatory filing the departure of two top executives, chief operating officer James Fortescue and co-chief investment officer Kristopher Konrad.

A primary focus, or what Goldstein see as his mandate, “is consistency over time, whereas the mortgage REITs of the world see their mandate as high returns, high dividends and gathering assets,” he said. “There’s an enormous interest and following of the agency mortgage REITs. What you see though is that the mortgage REITs, the Annalys of the world tend to have 50% swings in their share price or NAV. We tend to have far more modest swings in our price/NAV.”

Featured image via iStock

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