New US mortgage derivative index launches Wednesday

NEW YORK, April 27 (Reuters) - A new mortgage derivative index hits the market on Wednesday, giving investors another way to hedge Wall Street's residential mortgage-backed securities or bet on the direction of U.S. housing.

The new index, the PrimeX, is the latest installment by data company Markit, which four years ago developed the ABX index that became a notorious tool for hedge funds and other investors to ride the subprime mortgage market to its demise.

The PrimeX is based on "prime" mortgage bonds backed by large loans by Wall Street, and whose performance has until recently been eroding as home prices fell and foreclosures reached more expensive homes. It is a "synthetic" way to gain exposure to specific assets, and will let investors take short or long positions, according to Markit.

Buyers of the PrimeX will receive protection payments for any interest shortfalls or write-downs of principal, according to a JPMorgan Chase summary. The protection seller takes the other side of the trade.

Dealers and investors are expected to trade the index, which will be priced daily, Markit said in a statement.

Mortgage derivative indexes in 2006 and 2007 were commonly used by hedge funds to successfully bet against the housing market in 2006 and 2007. Trades included owning equity in a type of asset-backed security known as a collateralized debt obligation, and shorting the ABX or the lower-rated debt of another CDO, according to Merrill Lynch research from 2006.

(Reporting by Al Yoon; Editing by Kenneth Barry)