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Aladdin Eyes Distressed Mortgage Fund

The hedge fund is raising money to invest in scorned subprime-backed paper.

Add another name to growing string of institutions hoping to find bargains in the troubled asset-backed securities market that has been the bane of financial institutions including


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Merrill Lynch



Stamford-based hedge fund manager

Aladdin Capital Management

, which manages some $20 billion in assets, is trying to raise cash to invest in esoteric subprime securities that have seen their values decimated over the past several months amid rising residential loan defaults.

People familiar with Aladdin's plans told

that the hedge fund is pounding the pavement in an effort to lure backers ranging from wealthy individuals to institutional investors, such as pensions and insurance firms. An official at the firm declined to comment on the hedge fund's plans.

Aladdin joins a litany of firms, including

Goldman Sachs

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, which think that the distress wrought by loans made to borrowers with shaky credit may provide an opportunity for them to buy cheap and reap fat returns.

Goldman chief Lloyd Blankfein said during a Merrill-sponsored investor conference in New York earlier this week that the firm had raised some $4.5 billion to invest in distressed assets, including leveraged loans stuck on many bank balance sheets and arcane structured debt known as collateralized debt obligations, or CDOs.


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CEO Larry Fink made similar remarks at the same event.

Fortress Investment Group


also said earlier this week that it was considering

ramping up its investments in mortgage paper.

A crisis of confidence in the credit markets, and specifically those markets related to CDOs -- structured mortgage debt that has been sliced and diced into pieces and sold to investors -- caused a precipitous decline in the values of these securities.

The market dislocation left firms such as

Bear Stearns


, Citi and Merrill left holding the bag, leading to massive writedowns at all three banks. Those firms had been some of the largest originators of CDO paper

So far this year, CDO issuance is about $396 billion -- down 37% vs. last year's comparable period, according to a recent JPMorgan Chase credit analyst report. ABS paper can be bought from anywhere to 60 cents to 90 cents on the dollar, say asset-backed traders.

Now players are hoping that the time is ripe to make a bet that the mortgage market, which continues to look abysmally soft as the specter of recession looms over the overall U.S. economy, is at or near the bottom.

"You can't find anyone that has anything good to say about the housing market," Ed Steffelin, portfolio manager at GSC Group in New York, tells


The GSC official notes that trading in the damaged asset-backed market has started to ease and that the expectation is that investment banks and others will eventually start to cash out of troubled debt at discounted prices.

Steffelin declined to comment on GSC Group's own opportunity fund, Eliot Bridge, which he is expected to manage according to a



Others funds, including TCW Group and Marathon Asset Management of New York, are said to have already raised sizeable funds that are expected to employ a low- to no-leverage strategy of navigating the landmine that has been the subprime securities market.

If these vehicles' investment managers find the right timing, they could score unlevered returns of 20% or better. But if they're wrong, they could be stuck holding the bag.

Speaking generally, Steffelin said that a lot of investors are aiming to enter the space for distressed investing but said that few firms had the intellectual wherewithal or balance sheet to give potential investors any confidence.

Market watchers tell

that some fund managers are having trouble getting investors to feel comfortable handing over large sums of money in a market that has already proven too dicey to negotiate for some of the savvier players on Wall Street.

For some there is reason to believe that the worst may not entirely be over. Unsettling news continues to be the order of business and banks continue write down debt.

Barclays Capital

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hosted a conference call Friday morning to discuss the implications of the potential demise of one or more mono-line insurance companies due to potential downgrades by

Moody's Investors Service



. The downgrade of such firms, which insure trillions in debt issued by entities from public corporations to municipalities, could have big ripple effects in the market

On top of that,

Fannie Mae


was forced to host a conference call in a futile attempt to allay investor concerns that it was using

dodgy accounting to mask mortgage losses, highlighted by Thursday article from



All the negative news would seem like a bad time to get into distressed assets, but maybe the growing din from financials about writedowns and depressed profits means things can't get any worse.

"A lot of people disagree on timing," Steffelin says. "The question is, how much of that housing market is priced into the securities that we are buying today?"