Fannie Mae-No Politics (FNMA)

[TheMotivatedTrader]

WSJ: Hedge Fund Casualties from Fannie, Freddie Multiply

http://blogs.wsj.com/moneybeat/2014/11/18/hedge-fund-casualties-from-fannie-freddie-multiply/

More hedge funds are joining the ranks of those injured from a September court decision that slammed shares in mortgage giants Fannie Mae FNMA +0.98% and Freddie Mac FMCC +2.03%.

Carlyle Group CG -1.34%’s Claren Road Asset Management hedge fund arm, earlier tipped as among those hit hardest by the fall-off in Fannie and Freddie shares, ended up with its worst month ever in October.

Claren Road finished last month down nearly 10% and is off about 9% for the year. Its assets dipped to $7.3 billion at the end of October from $8.5 billion the prior month, according to investor documents viewed by the Wall Street Journal. Claren Road was founded in 2006 by veterans of Citigroup C +0.45%.

New York hedge-fund firm Marathon Asset Management lost 3.2% in October on its Fannie Mae and Freddie Mac wager, according to an investor letter viewed by the Wall Street Journal. The losses canceled Marathon’s paper gains on the trade.

The bets on the Fannie and Freddie had been bold ones by hedge funds. Several hedge funds including Fairholme Capital Management, and Perry Capital challenged the U.S. government’s 2012 decision to sweep nearly all of Fannie and Freddie’s profits to the U.S. Treasury rather than collect set dividend payments.

A U.S. District Judge on Sept. 30 to threw out the lawsuit bought by the hedge funds. Fairholme and Perry are appealing the decision.

In a letter to investors this month, Claren Road said the decline in Fannie and Freddie’s shares was “much greater than we had contemplated” but added: “Our conviction in this investment remains unchanged…In our view, it has been and remains a multi-faceted investment and continues to have a compelling risk-reward profile,” the letter said.

Marathon also told its investors it believed its remaining, smaller stake in the mortgage-finance giants “offer compelling value with upside catalysts.”

Still, Marathon said in its investor letter that it had sold off some of its stake, made up of both preferred and common shares, with the falling stock prices “trigger[ing] stop-loss provisions in Marathon’s risk management policies.”