Mariner Teeing Up Mortgage-Bond Vehicle

Fixed-income fund operator Mariner Investment is about to launch a vehicle focused on mortgage-backed securities, replicating a strategy that has generated double-digit returns for the firm’s multi-strategy hedge funds.

Mariner MBS Arbitrage Fund will be led by mortgage-bond traders Matt Schulman and Greg Schwab, who currently manage about 20% of the assets in the $11.7 billion firm’s flagship vehicles, Mariner Partners and Mariner Atlantic. Their portfolio gained 95.8% in 2009 and 18.1% in 2010, and was up 15.7% this year as of Sept. 30. The new MBS fund is set to begin trading this month.

Schulman, who joined Mariner in 2007 from Truman Capital, and Schwab, who arrived in 2005 from Bear Stearns, buy mortgage bonds whose values have been depressed by investor fears about credit quality, prepayment risk and lax underwriting standards. Their strategy is to hold on to the securities until market sentiments turn favorable, then sell the investments opportunistically.

Marketing documents for their planned fund say the managers continue to be bullish on the mortgage-backed securities market. One reason for their optimism: A large number of homeowners with mortgage balances exceeding home values, combined with more stringent underwriting standards, has put a lid on refinancings — which, in turn, has lowered prepayment risk.

And while mortgage-bond prices are well above their financial-crisis lows, there are still plenty of bargains to be found. “Deeply discounted senior secured bonds should continue to receive monthly cash interest and pay-downs, and should therefore yield returns in the low-double-digit to mid-teens range,” said Brian Shapiro, head of hedge fund consulting firm Carbon Advisors of New York.

The Mariner vehicle will charge typical hedge fund fees of 1.5% of assets and 20% of gains. Investors will be permitted to withdraw quarterly, subject to a “gate provision” that caps combined redemptions at 25% of the fund’s assets each quarter.

Before joining Mariner, Schwab was a managing director on Bear’s mortgage-bond desk. His specialties included trading collateralized debt obligations and structuring mortgage derivatives.

Schulman previously oversaw the valuation, acquisition and securitization of subperforming and nonperforming home loans at New York-based Truman. Earlier, he traded agency mortgage paper at Donaldson, Lufkin & Jenrette.

Mariner, based in Harrison, N.Y., was founded in 1992 by former Bear executive William Michaelcheck. Last year, Tokyo-based Orix Corp. acquired a 60% stake in the firm.

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