Wrong-way bets on mortgage bonds and a recession saw Deer Park Road Management’s flagship hedge fund post its biggest annual loss since the fund began trading in 2008, according to a report by Bloomberg.

The report cites people familiar with the matter as confirming that the firm’s STS Master fund lost 23.4% in 2023, with most of the damage being done in January, when the fund racked up its biggest ever monthly decline of 11.7%, and the second quarter of the year, according to an investor letter seen by Bloomberg.

In an interview with Bloomberg, Deer Park's CIO Scott Burg said: “Coming out of 2022, the assets in our long book were priced for a recession that never happened.” And while the fund then took "a defensive positioning", according to Burg, "the damage had been done”.

The $1.8bn fund also lost ground by shorting the high yield index, which unexpectedly rallied hard toward the end of the year on optimism that interest-rate cuts were on the horizon, boosting other credit hedge funds.

With markets currently preparing for the Federal Reserve to start cutting interest rates this year, the firm's founder, Michael Craig-Scheckman, is expecting the firm's bets, the vast majority of which include legacy residential mortgage-backed securities (RMBS), to gain momentum in 2024.

“The assets we have will perform extremely well, particularly factoring in any rate cuts this year,” he told Bloomberg.