Business and Personal Finance Dictionary

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• MORTGAGE BACKED SECURITIES HEDGE FUNDS
  
  Generally focus on being long the actual mortgage backed securities and short some proxy such as TBAs (To Be Announced), futures, Treasuries or derivatives. These funds typically purchase highly rated agency paper, CMOs, or REMICs and finance the positions in the "repo market." This financing can often result in gross asset, principal or market values of $10 billion for an initial cash/equity position of $1 billion dollars. In some respects it is comparable to buying a house with borrowed money. It is the borrowing which magnifies the performance. If the market quickly jumps 10 percent higher, then the buyer doubled his investment. Here, it would be 10 percent of $10 billion or a $1 billion profit against an initial capitalization of $1 billion. However, if the market declines by 10 percent, then the original investor is out. If the market went down 25 percent, then the original investor is gone but the lending institution (bank or brokergage firm) is on-the-hook for $1.5 billion. Effectively, this is what has been recently occurring in the financial industry. The lenders are becoming defacto new investors, holding losing positions, because of defaults.
  
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