NEW YORK Greg Lippmann's $2.3 billion hedge fund LibreMax Capital, which produced double-digit gains this year with big and successful bets on residential mortgage securities, is looking to the commercial real estate market to boost returns.
The hedge fund, which gained more than 8 percent in the third quarter, when most funds rose about 5.8 percent, told investors in a quarterly letter reviewed by Reuters that it was "excited about the opportunities in the CMBS credit space" and had increased exposure to those securities in the three months through September 30.
Lippmann also added exposure to collateralized loan obligations (CLOs) and consumer asset-backed-securities (ABS) over that period, while reducing the fund's exposure to subprime mortgages.
"As much as the Fed's QE3 announcement in September has demonstrated the potential to positively affect the RMBS market, residential lending remains constrained," Lippmann said in the letter, dated November 19. "By contrast, quantitative easing has had, and will continue to have, a meaningful impact on commercial lending, as lower rates improve borrowers' ability to refinance across property types."
In the third quarter the U.S. Federal Reserve announced a new economic stimulus plan in which it would buy $40 billion every month in mortgage-backed securities until the labor market improves substantially.
Lippmann said the fund's "largest portfolio increasesattributable to subprime" during the quarter.
Lippmann founded LibreMax with three other former colleagues from Deutsche Bank in 2010.
"While we still see tremendous value in RMBS, we have also been able to source several large opportunities in shorter duration non-mortgage backed bonds," he said in the letter.
At Deutsche Bank, Lippmann was a mortgage trader who called the U.S. housing bubble early, earning the bank billions of dollars and himself the nick-name "Bubble Boy" among some on Wall Street.
Lippmann stepped down as the bank's global head of asset-backed securities trading in April 2010 and launched his hedge fund in October that year.
GAINS IN OCTOBER HELPED BY ABS TRADE
While subprime investments were the main contributors to returns in the third quarter, LibreMax benefited from "a large consumer ABS trade" in October.
The fund rose 2.21 percent last month, while the S&P500 stock index fell about 2 percent.
During October LibreMax reduced its student loan exposure but increased credit card holdings. It also added investments in CMBS and CLOs, it said in its October note to investors.
Since LibreMax launched, the firm has produced annualized returns of about 12 percent.
(Reporting by Katya Wachtel; Editing by Dan Grebler)