More gauges for mortgages

The mortgage arbitrage universe had a performance drop-off in May. Its backers say it was just a blip. But the style presents some significant risk management challenges.

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Mortgage arbitrage hedge funds – which, as low-correlation, low-volatility return sources have been popular in recent years with investors – performed poorly in May. For some funds it was the first down month since 1998. Industry veterans say the factors contributing to the drop-off were not structural, and that the style remains attractive overall.

But investors have reason to be wary of mortgage hedge fund strategies – blow-ups such as David Askin’s $600 million loss in 1994 and the implosion

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