Distressed bond trader Devaney ponders new fund

MIAMI (Reuters) - John Devaney is back.

The iconic chief of United Capital Markets, the Key Biscayne, Florida-based securities broker-dealer, has snapped back from a bruising mortgage bond loss during the 2008 financial crisis and may expand his business for the first time since 2006.

Devaney said he is "noodling" with the idea for a $200 million debt hedge fund with $20 million of his money and a fresh angle. He would take the first $20 million of loss in return for a bigger-than-usual share of profits.

The move isn't certain, but Devaney said he's been approached by European and New York customers that "want exposure" to his firm. Devaney said he earned more than 100 percent returns for the past two years on esoteric bonds, including distressed credit card deals and residential mortgage debt backed by loans that let borrowers reduce equity in their homes.

The fund could help him "expand very rapidly" from the $60 million of his own money he manages, and vault him into position to eventually manage "a few billion," he told Reuters on Monday in Miami at the IMN ABS East conference, where he is known for hosting lavish parties.

Devaney accumulated yachts, jets and real estate until the financial crisis led to the implosion of his risky mortgage fund business. Often portrayed as a symbol of the excesses that followed financial success, Devaney today said he is just happy to be stable financially, and he has learned to control some of the competitive drive that led him to expand too quickly in the mid-2000s.

But the tone of the conference suggested a revival of bond market fervor as attendees packed parties hosted by securities firms, including Barclays Capital and Citigroup. Devaney has trading relationships with more than 300 such counterparties, a factor behind his plans.

"I don't know what's around the corner, but maybe next year I'm going to end up growing," he said. "I'd really like to buy an apartment in New York. And there are several people that have said, 'If you set up an office in New York City, I'll come work for you in a second.' So I might grow my firm a little ... that might be a whole next chapter."

Devaney even has a name in mind for a fund. It might be called "Client First LLC," he said, a plain-language moniker based on the thesis that the manager cannot take any money out until after the assets are sold.

His last foray into hedge funds ended badly, and he was forced to freeze them in 2007 and later liquidate them when banks withdrew support.

Expecting at least another two years of good opportunities in illiquid, distressed debt, he said he is confident that he could transform an initial $200 million to $600 million over five to seven years. He'd need more than 10 percent to 15 percent returns for him to get paid, he said.

His forecast contrasts sharply with returns closer to 5.0 percent on more actively traded mortgage bonds.

In one of his top trades, Devaney bought $70 million of risky debt from bankrupt credit card issuer Advanta Corp for himself -- and placed another $250 million for his customers -- at prices between 20 cents and 40 cents on the dollar in 2009.

Undeterred by Wall Street analysts' warnings on the securities, he watched the bonds soar through mid-2010 to a bid of 85 cents as it became clearer that the bonds would pay off.

Some customers made more than 100 percent in less than a year on the trade, said Devaney, who pocketed $25 million to $30 million. His net worth has stabilized at about $125 million, down from about $275 million at its peak.

"We still have a following of a lot of customers that turn to us and respect the fact that I trade all this stuff with my own money," he said.

Hand-shakers on Monday descended upon Devaney in droves as he walked the hallways of the famed Fontainebleau Hotel, where in the 1964 film "Goldfinger," James Bond thwarted a plot to blow up the Fort Knox gold depository. Devaney, too, put on a show, with family yacht "Dorothy Ann" moored across the street and by hosting a "couple hundred thousand"-dollar party with a band and dancers for his trading partners and other conference attendees.

"John Devaney is like a barometer for the whole ABS market," said Daniel Nigro, a New Jersey-based consultant with 25 years of bond market experience.

"He would always make a big splash, with a group playing, and he'd take people out to his boat 'Positive Carry' -- all the excesses that were there in the market. Then he collapsed hard, in front of everybody, and I'm sure there were people that relished it, some kind of schadenfreude," Nigro said.

"He's now built his business up, much like the ABS business -- a lot of us got shot down, with the hubris, and we dusted ourselves off, reinvented ourselves," he added.

(Editing by Padraic Cassidy)