His approach comes at a time when some hedge-fund managers, including Third Point’s Daniel Loeb and Moore Capital Management’s Louis Bacon, bemoan political intrusion and complain that Washington is anti-business. Friedman, 66, was on the receiving end of government pressure himself eight years ago, when he left the bank he co-founded amid a probe and subsequent settlement with U.S. regulators over improper trades.
“While a lot of investors avoid uncertainty, others see it as a trading opportunity,” said Stephen Myrow, managing director of Washington-based ACG Analytics, a firm that provides political intelligence to hedge funds and other clients. “If you understand how government works and can properly assess the politics of the moment, you can capitalize.”
Friedman runs the debt fund with senior portfolio manager Jeffrey Hinkle, who joined EJF in 2007 after working as a stock analyst at FBR. Another veteran of Friedman’s old investment bank who followed him to the hedge fund is EJF Chief Operating Officer Neal Wilson, a former Securities and Exchange Commission attorney who helped manage FBR’s hedge-fund and private-wealth business. Wilson said the firm wouldn’t comment for this story.
Friedman’s strategy is to take advantage of the unsettled regulatory environment and government’s heavier hand in everything from bank oversight to housing policy.
It helps that EFJ operates in Arlington, outside the traditional hedge-fund enclaves of New York and Greenwich, Conn. Proximity to Congress, the Treasury Department and the Federal Reserve, the nerve centers of the $700 billion banking bailout in 2008, hasn’t hurt. The debt fund has never had a losing year.
Friedman outlined his tactics in a December 2011 marketing document obtained by Bloomberg News, saying EJF takes advantage of the shift in power from financial executives to regulators by trading securities that banks will target to clean up their balance sheets in response to new rules.
“Catalysts” that Friedman lists for his investments are Dodd-Frank, the Basel III international capital rules that began to take effect this year and “regulatory pressure to reduce operating leverage.”
Along with securities issued by banks, EJF bets on housing as well as collateralized debt obligations made up of pools of real-estate loans. The Fed took on CDOs as part of its 2008 rescues of Bear Stearns and American International Group.