Toscafund, the hedge fund run by the former top-rated banks analyst Martin Hughes, is considering setting up a new business lending capital to banks.
Tosca is hoping to scoop lucrative premiums by writing new business that effectively insures riskier parts of a bank equity structure. The move is an indication that hedge funds believe that European banks are now much less likely to suffer significant losses in the coming years.
One banker, who declined to be named, said: "This is a good idea. Many banks across Europe, faced with onerous capital constraints, are looking to free up capital to deploy elsewhere."
Speaking to The Independent on Sunday, Charles Schrager, the former Credit Suisse banker and chief investment officer for the fund's Tosca Mod mortgage operation, said lending to banks would be one part of a significant expansion of the group's operation in the coming months.
Tosca is looking to raise as much as £500m for a new fund by the end of the summer after the success of its first fund last year.
The group has prospered in the last year as large banks have sold off what they perceived to be risky mortgages with a high chance of default, but which proved to be much less delinquent. With banks continuing to be willing sellers and with just a handful of buyers in the market, Tosca has managed to snap up bundles of mortgages at less than two-thirds of their original price.
"There is a social agenda with the funds, as the strategy allows banks to free up capital for new lending, which is helpful for the economy, and debt forgiveness for individual borrowers, which increases their disposable income," said Mr Schrager.
Tosca's first fund is expected to yield returns as high as 22 per cent, although new funds, focusing on longer-term mortgage products, will yield less.
Mr Schrager said that Tosca would not be entering the potentially more lucrative distressed mortgage market.
"No, you won't find Tosca's representatives knocking on the door to repossess," said Mr Schrager. "That's not what we are about. Although we hope to make strong returns for our investors, this whole operation has a social agenda at its core."
Mr Schrager said that with UK housing market transactions low compared to recent years, there was significant demand from consumers and housebuilders for extra mortgage funding. "There are sensible risk-adjusted returns to be earned from lending and this should improve the health of the UK housing market overall," he said.
The success of Toscafund's foray into the mortgage arena comes as it continues to prosper after suffering a well documented decline in 2007.
At the start of the year Mr Hughes said he continued to have faith in the residential housing market, saying: "We feel we're going to make a lot of money out of housebuilders as they're undervalued. Media hysteria has house prices falling this year, but they're going up."Reuse content