Metacapital Outperformed Hedge Fund Peers Via Mortgage Bonds

Deepak Narula made a mark for himself when he was named the most successful large hedge fund manager on the Street in 2013 and 2014 owing to the outsized gains his hedge fund, Metacapital Management, made at a time when most other hedge funds were finding it hard to stay positive for the year.

Narula was a guest on this Sunday's edition of Wall Street Week. In his interview, he talked about how he managed to perform so well trading mortgage bonds following the financial crisis and where he is putting his money right now.

The Strategy

On how his hedge fund managed to perform so well, Narula said, "The real distress was on the bonds that did not carry the government's guarantee on the principle. And as home prices fall, and as home prices fell, in many cases borrowers defaulted on their mortgages and the bondholders basically had to settle for whatever the home was worth. And the homes fell a lot in value."

He continued, "We were down 35 percent in price from the peak. And so, these bonds in anticipation fell a lot. And we have the tools to do the analysis that – let's assume that 80 percent of the borrowers do default, and for all the borrowers that do default, you get maybe $0.20 on the dollar even on the home – even at those assumptions, you could really buy bonds that were yielding 12 or 15 percent for six, seven years."