Here’s Why the Smartest Hedge Fund Managers Invested in Mortgages

Turning lemons into lemonade, Deepak Narula, founder of Metacapital Management LP, has used Fannie Mae and Freddie Mac, the deeply unpopular and controversial mortgage aggregators that were taken over by the federal government in 2008, to build the world’s most successful hedge fund.

While the head of the House Financial Services Committee would like to abolish them — after all, their irresponsible lending practices contributed to the mortgage crisis that plunged the U.S. economy into a recession from which it has been slow to recover — they still own or guarantee more than half of all U.S. housing loans, which is why the Obama administration will do whatever it takes to keep them afloat.

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That’s where Narula comes in. His Mortgage Opportunities fund is up 520 percent since it started trading in July 2008, but most of those gains were fairly recent. Toward the end of 2011, government-backed mortgage securities dropped in value, both as a result of expanded programs to help borrowers refinance, and the declining values of uninsured bonds amidst the European debt crisis. Narula took advantage, predicting that the Federal Reserve would buy agency mortgage bonds to help out homeowners. He was right, and the move paid off in spades…