Salient to Investors:

Deepak Narula at Metacapital Mgmt said the Fed’s mission is to drive down the 30-year mortgage rate to let homeowners refinance.

Narula uses mathematical models to calculate how long homeowners will make payments at their current interest rates before either refinancing or defaulting – models based on a homeowner’s credit score, address, loan size, loan age and other factors. Narula attributes his success to long years of studying the bond markets.  Narula said many haven’t been able to refinance because housing values have fallen and banks are stingy with new loans. Narula expects hefty returns from agency bonds for several more years.

Hedge funds averaged return of 1.3 percent through October versus a 14 percent gain, including dividends, for the S&P 500. Since Jan. 1, 2009, the average hedge fund gained a cumulative 13.5 percent versus 69.8 percent for the S&P 500.

Andrew Junkin at Wilshire Associates said hedge funds oversold themselves for a long time, claiming to get stock sized returns with lower volatility, but 2008 blew that myth out of the water. Over the last five years, hedge funds returns relative to 60/40 stocks and bonds has not delivered.

Hedge Fund Research says 635 hedge funds closed in the first 9 months of 2012, 8.5 percent more than a year earlier.

Steve Kuhn at Pine River is cutting holdings in the subprime mortgage market. John Bailey at Spruce Private Investors said the easy money has been made.

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