ValueWalk – The list of funds who tumbled in May and have continued to under-perform in June is getting longer by the day. Credit focused funds, especially those who trade mortgage backed securities, experienced a time of high performance as the Federal Reserve took up a $85 billion/month bond purchase program out of which $40 billion was dedicated to MBS purchases only. As the Fed continues to drop heavy hints that it will wind down the easing program as soon as the labor market improves, funds focused on such securities are in for a tough ride.
The billions injected into the market with QE have helped investors to profit from securities issued by mortgage lenders Fannie Mae, Freddie Mac and Ginnie Mae. Hedge funds who invested in MBS, ABS and RMBS returned in the range of 16 to 26 percent last year. MBS focused hedge funds populated last year’s best performing lists and we are expecting them to populate the lower end of monthly returns for the next couple of months.