Hedge fund gears up to buy subprime bonds, cheaply

By Al Yoon

NEW YORK (Reuters) - Hedge fund firm Black Pearl Asset Management on Tuesday said it will launch portfolios to snatch up cheap subprime mortgage securities battered by the current crisis.

Black Pearl, co-founded by Jim Midanek and John Pak in 2002, will invest up to $500 million in mortgage securities that have been tarnished amid increased risk-aversion in the sector, the managers said in a statement. The subprime market is approaching a point where "widespread price dislocation" is likely, Pak said in the statement.

"Investors need to position capital now to participate in this tactical trade," Midanek said in the statement. "The investment phase of this cycle is nearly upon us."

Indexes representing subprime mortgage securities have slumped to record lows this year as rising delinquencies on the underlying loans and the extended slump in U.S. housing suggest losses will build. The main ABX-HE index of low-investment grade bonds has lost more than half its value this year, hitting a record low this week.

Hedge funds able to accept bigger risks are seen among the worst hit by the subprime crisis. Two funds run by Wall Street mortgage giant Bear Stearns Cos. BSC.N asset management arm came close to failure in June until a bailout was orchestrated by its parent. Heavy redemptions by investors rattled by subprime concerns have closed or crippled at least two other hedge funds in recent weeks.

Midanek, a 22-year mortgage veteran who helped start JPMorgan's mortgage trading group in 1987, said Walnut Creek, California-based Black Pearl will focus on smaller subprime investments often not available to larger hedge funds. Clients will have separate accounts to buy distressed bonds, he said.

Rating companies such as Standard & Poor's exacerbated declines in the subprime indexes last week by lowering ratings on billions of dollars in subprime bonds. Investors expect ratings on collateralized debt obligations that include portions of subprime bonds will also be cut.

Forced sales by investors constrained by ratings may cause "price overshoots on the downside," Mohamed El-Erian, president and chief executive officer of Harvard Management Co. said in an interview last week.

(With additional reporting by Jennifer Ablan and Richard Leong in New York, and Svea Herbst in Boston)