BEVERLY HILLS, California (Reuters) Subprime mortgage-backed securities are a good deal with potentially high returns and little competition now that much of the dust of the housing crisis has settled, said Josh Friedman, co-founder of hedge fund Canyon Partners LLC on Tuesday.
Los Angeles-based Canyon Partners owns about $4.5 billion of such securities, which Friedman said trade at about 40 cents on the dollar, maximizing their potential returns and minimizing risks. Friedman estimated the market for such securities at more than $1 trillion.
“There are hundreds and hundreds of players in the market searching for yield,” Friedman said on a panel discussion at the 2011 Milken Institute Global Conference in Beverly Hills. “The nice thing, structurally, about this market is there haven’t been natural inflows into the market. It’s nothing but sellers.”
Many investors have resorted to taking on more risk across mortgage, corporate and emerging market bonds to boost returns amid record-low interest rates. But a deteriorating housing market and more onerous foreclosure procedures may result in greater-than-expected losses on subprime-backed bonds, some investors have said.
Subprime bonds helped trigger the financial crisis after borrowers defaulted and banks were left with homes whose value had tumbled. Now some investors consider subprime debt a good deal, partly because they believe the worst of the foreclosure crisis has passed and the remaining debt is of higher quality.
Friedman, who is also co-chief executive of Canyon Partners, said investors have to research thoroughly the securities before buying them. “There’s a wealth of information in each of these securitizations,” he said.
Friedman spoke on the second full day of the conference. He was joined on the panel by Carey Lathrop, head of global credit markets at Citigroup Inc; Steven Tananbaum, managing partner and chief investment officer at GoldenTree Asset Management; and David Warren, chief executive of Brevan Howard Credit Catalysts Master Fund.
Reporting by Philipp Gollner; Editing by Steve Orlofsky