Citadel Bets on Mortgage Company

Chidem Kurdas

A fund managed by Citadel Group entered into an intriguing swap agreement regarding the shares of Cherry Hill Mortgage Investment Corp., which had its initial public offering last week, raising $130 million.

The Citadel investment vehicle, called Surveyor Capital, agreed to pay a broker-dealer any decrease in Cherry Hill shares from a base price. This is for 75,000 shares from time to time over two years—a relatively long period. In return the dealer agreed to pay Surveyor any increase in the price of Cherry Hill stock for that number of shares.

In other words, with the swap Citadel bet that Cherry Hill will rise, though the stock fell in the aftermath of the IPO from $20 to $18.50. Citadel traded the shares at less than $20 The swap contract appears to be signed right after the IPO.

The swap is only one part of Citadel’s interest in Cherry Hill. Various Citadel funds and accounts in combination own a large stake, signaling a commitment by the hedge fund manager to mortgage-serving and mortgage-backed securities despite the risk posed by rising interest rates.

Rates may have stabilized following the Federal Reserve’s decision last month to put off tapering its bond purchases but are almost certain to rise sooner or later. A key question is how severely this will affect the mortgage market. The Citadel team seems to be confident that there won’t be a major adverse impact on Cherry Hill’s business, at least not in the near future.

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