Hedge fund turns Fannie Mae junk into CDO-like securities

New York

A FLORIDA hedge fund has transformed risky Fannie Mae and Freddie Mac debt into investment-grade securities, and it could end up helping the mortgage giants' efforts to offload more of their risk.

Bayview Financial packaged junk-rated securities issued by the two government-backed companies into US$118 million of new bonds last month that Fitch Ratings stamped with grades as high as A-. The sale allows the hedge fund to borrow against its investments in mortgage debt, giving it fresh funds to buy more assets to boost its returns.