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Victor Baev Matthias Knab, Opalesque for New Managers: When U.S. mortgage rates jumped, the textbook expectation was that mortgage lending would shrink. In the corner of the market Victor Baev has traded for a quarter century, the opposite happened.
Lenders squeezed out of a shrinking conventional market moved into second liens and non-qualified mortgages, and bond issuance backed by those loans is driving non-agency RMBS close to USD300 billion this year, up sharply from recent levels. Baev, who traded mortgages at Credit Suisse through the 2008 crisis and then ran non-agency RMBS, CMBS and whole-loan strategies at Pine River Capital Management for more than a decade, is now chief investment officer of Dundon E1 at Dundon Advisers Capital. The firm is preparing to launch Dundon E1, a multi-strategy fund investing across U.S. mortgage securities and loans, and expects to go live in the first quarter of 2027.
Baev spoke with Opalesque founder Matthias Knab about where the growth is coming from, what the crisis taught him about how a mortgage team should be organized, and the returns he is targeting. The conversation has been edited for length and clarity.
Matthias Knab: What are you launching?
Victor Baev: We are launching Dundon E1, a diversified mortgage credit fund under our asset manager, Dundon Advisers Capital. We've made significant progress in our launch preparations and are on track to begin operations in Q1 2027.
The fund invests across the U.S. mortgage markets, in both securities and loans: agency MBS, non-agency RMBS, CMBS, residential whole loans and mortgage REITs. The theme is combining tactical trading in the liquid parts of these markets, where we take more of a market-neutral approach and play for dislocations as they arise, with a more opportunistic focus deeper in the capital structure. For those investments the entry point really matters, so we put them on when we see bigger dislocations.
We also have an approach in the residential whole-loan market, where we've seen a lot of growth. We work with mortgage lenders, acquire loans and securitize them: we put the loans into deal trusts, sell the investment-grade bonds and retain the deal equity in the RMBS transactions. So it is a multi-strategy fund within the mortgage market.
Matthias Knab: This isn't your first time in these markets.
Victor Baev: No. My background spans about 25 years in the mortgage and rates markets, on both the sell side and the buy side. I was a portfolio manager at Pine River Capital Management for over a decade, managing non-agency RMBS, CMBS and whole-loan strategies.
Before that I was a mortgage trader at Credit Suisse, before the crisis and as it hit. I started in agency markets, trading agency CMOs and mortgage derivatives. Then I moved to whole-loan trading and securitization in subprime and second liens leading into the crisis, and when the crisis hit I focused on distressed whole-loan trading. Before Credit Suisse I worked in interest rate derivatives at Barclays and Dresdner.
Matthias Knab: Rates went up and mortgage lending slowed. Where is the growth coming from?
Victor Baev: It's a little counterintuitive. Typically, when rates go up, fewer people take out mortgages because they are less affordable. That has certainly happened in the conventional, agency side of the market, where originations have diminished.
But because of those lower volumes, mortgage lenders flocked to the non-agency market. Second liens have been a big area of growth since rates shot up, because they let borrowers tap their home equity. We expect about USD180 billion to USD200 billion of second-lien originations this year.
The other market is non-QM, or non-qualified mortgages, which sits outside the scope of the GSEs. It has really developed since 2015 and caters to self-employed borrowers and to investors who qualify based on the rental income of the properties they buy. That market has expanded exponentially over the last few years, and again we expect close to USD200 billion of originations.
Those two markets have fueled the creation of non-agency RMBS. This year we expect close to USD300 billion of issuance, after it had been running in the high 100s to low 200s of billions. That's a significant increase.
Matthias Knab: And the rest of the mortgage market?
Victor Baev: Agency MBS is a USD9 trillion market, and it is very much driven by the rate volatility we've been seeing. That creates the opportunity to pick up wider spreads and take advantage of dislocations.
Commercial real estate is also very interesting. It is contending with higher interest rates and all the pressures that come with them. For us that creates the opportunity to find better entry points.
Matthias Knab: Why launch now?
Victor Baev: Part of it is the growth I described and the pressure built up from higher volatility and higher rates. But it is also simply that rates are high. These are fixed-income investments, and we would be getting in when they offer a great return from a carry standpoint.
Our approach is very much about finding asymmetric profiles. These securities have various options embedded in them, and that's what we go after. When we invest, we apply a certain set of assumptions. The goal is not just to meet those assumptions but to have the opportunity to outperform them, so that the option value we expected actually comes through in performance.
Matthias Knab: Anyone who hears "mortgage fund" thinks of 2008. What did you learn from that period?
Victor Baev: When I went through the crisis I was in the mortgage group at Credit Suisse. It was a very large team covering every mortgage sector: agency, non-agency, and within non-agency various tiers of credit, such as second liens, subprime and Alt-A. Each one operated as a separate silo, a separate business unit, trading securities, acquiring loans and doing deals.
That approach creates a lot of specialization, but it also creates a very siloed operation. One of the lessons I took away is that I prefer a much broader approach. We are organizing our fund so that the team can pivot. Portfolio managers are not tied to responsibility for one sector. The portfolio is meant to function as a whole, and the team shifts its focus toward the markets that offer the best relative value, growing in those areas and shrinking the portfolio in areas that have run up.
That serves several purposes. People can see the dynamics across all these markets and compare relative value between them. It also helps mitigate the risk that builds up in parts of a portfolio that may no longer deserve the capital. When portfolio managers are responsible for the health of the entire portfolio, it shifts their thinking from preserving capital in one part of the book to preserving it for the whole portfolio and moving it to where it is most deserved. And it's not just the chief investment officer thinking this way. It's all the portfolio managers.
Matthias Knab: Who is on the team?
Victor Baev: We will bring the team on as we launch. We've identified former colleagues from Credit Suisse and Pine River who, like me, have long experience in the mortgage market. One prospective team member has spent most of his career in agency MBS, non-agency and other securitized and derivative markets. Another has a strong quantitative modeling background and went on to mortgage-backed bond trading and portfolio management. A third has focused on residential whole-loan trading. It is a very complementary set of skills.
Matthias Knab: What returns are you targeting?
Victor Baev: We are targeting double-digit returns for the fund. The liquid tactical trading may come in somewhat lower, in the low-to-mid teens, while in sectors such as whole-loan securitization we are targeting the mid-to-high teens.
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