BOSTON May 21 Hedge fund 400 Capital returned 3.26 percent during the first three months of 2014, beating its benchmarks as bets on residential mortgage backed securities paid off.
The firm, founded five years ago and run by Chris Hentemann, told clients in its first quarter letter seen by Reuters, "The overweighting to RMBS (residential mortgage-backed securities) drove absolute returns for the fund in 1Q14."
The fund's gains beat the HFRI fund weighted composite index' 1.1 percent return as well as the Barclay's U.S. Aggregate return of 1.84 percent. Last year the fund returned 15.23 percent and its average annual return is 20.43 percent.
The fund still has the bulk of its assets, 68.13 percent, in residential loans, but the exposure has been reduced some since the end of last year when the fund had 72.82 percent of its assets in RMBS.
Improving fundamentals, including fewer first time defaults and fewer nonperforming loans, have kept the sector attractive even as the pace of home sales has slowed some in the last weeks, Hentemann wrote.
During the quarter, Hentemann and his team focused on rotating out of higher dollar, lower yielding positions into lower dollar positions with room for prices to climb. The average dollar price for sales was just above $80 while the average price for new purchases was just under $53.
The fund, which has $990 million in assets, now employs 29 people, including 14 investment professionals.
"We have succeeded in deploying capital carefully and rotating across all the structured credit sub-sectors as our capital base and team has grown prudently," Hentemann wrote. He underscored the fund's low volatility profile and its low correlation to fixed income and equity markets.
400 Capital hired Emir Boydag as director of risk management, John Nusbaum as director of distressed credit and Tim Lynch as director of marketing and investor relations.
(Reporting by Svea Herbst-Bayliss; Editing by Cynthia Osterman)