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Tilson Turns Bullish on Distressed Debt

By Dan Weil   |   Thursday, 08 Jan 2009 11:52 AM

Hedge fund heavy Whitney Tilson is dipping into the market for distressed mortgage securities in expectation that losses on the underlying loans won't be excessive.

"For the first time in our 10-year history, we (T2 Partners) are buying distressed debt, and we are selling equities to do it," Tilson told the Reuters Investment Outlook Summit.

T2 allocated between 10 to 25 percent of its $100 million in assets to mortgage securities, including pools of subprime home loans.

T2 generally sticks to stocks. But in Tilson's eyes, mortgage debt represents one of the most attractive investments in years.

That's because desperation selling has forced distressed debt prices even below levels that would account for catastrophic losses, Tilson says.

Many of the securities that once carried "AAA" ratings now trade at 30 to 40 cents on the dollar, offering "enormous" profit opportunities, he explains.

While the economy is unlikely to rebound soon, the mortgage "crud" is oversold, because insurance companies, pension funds and college endowments have to dump their holdings at fire-sale prices, Tilson says.

In addition, most senior securities still pay interest, so T2 receives a return on its investment "very, very rapidly," he says.

PIMCO and TCW also have loaded up on mortgage securities. Their fund managers "found securities they feel are still solid credits," Morningstar analyst Lawrence Jones told The Wall Street Journal.

"They've bought them at attractive prices, and they could help returns for years to come."

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Hedge fund heavy Whitney Tilson is dipping into the market for distressed mortgage securities in expectation that losses on the underlying loans won't be excessive. "For the first time in our 10-year history, we (T2 Partners) are buying distressed debt, and we are selling...
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