The market for sub and non-performing mortgages is booming. (But you knew that, right?) What you may not know -- yet -- is just how diverse a crowd of investors are looking to stake a claim in varying sides of the market. Here at HW, we've covered some of the much larger funds jumping into the space looking to make a huge splash with billion-dollar commitments. But for every publicly traded hedge fund sensing a large-scale buying opportunity, there are others more content to pursue smaller deals and REO acquisitions that may deliver yields every bit as high. One well-known such player in this niche space is Rochelle Park, New Jersey-based Biltmore Capital Group, LLC, which has been buying up REO properties and distressed mortgage debt since 2005. The fund purchases up to $100 million in debt each year. Another firm said Monday that it's also looking to get into the small-deal space, citing a growing need for local and regional lending operations to clear their books of a growing pile of bad debt -- a market that many of the larger funds simply miss, because the debt isn't held by companies like UBS AG (UBS) or GMAC, LLC. Advantage Capital Equity Solutions, or AdCap to those familiar with the company, told HW that it's slated to launch the Advantage Capital Real Estate Opportunities Fund on October 1, 2008; the company is currently accepting commitments in the fund. Advantage Capital, with offices in Jacksonville, FL and midtown Manhattan, also manages two additional investment vehicles. Director of investor relations Louis Hanna told HW that AdCap's newest fund will focus on "under the radar" small deals, and -- like many of its larger counterparts -- will manage servicing and loss mitigation in-house, as well as running its own lending operations in-house as well. The lending platform will allow borrowers to refinance a loan directly rather than having to find an outside lender. "We will not be competing with the large Park Avenue-based hedge funds and Wall Street investment banks for deal flow," said Hanna. "Our sweet spot is REO and non-performing portfolios under $10 million. The larger funds and institutions really need to take down more sizable deals to move the performance needle." Managing whole loans We've met with more than a few fund managers over the past three months who have told us that there is an interesting bifurcation in the market for distressed mortgages -- those funds managed by MBS/ABS professionals, and funds managed by those who have come out of the servicing and loan management trenches. One skillset doesn't always cross over into the other, we've been told, and Hanna reinforced that idea. "Anecdotally, we have seen may funds launched by accomplished and respected RMBS and CMBS trading professionals," he said. "We believe our combination of mortgage firm operating experience and REO property management expertise offer us a distinct advantage and unique view of the current distressed real estate environment." Which is to say that RMBS paper isn't really moving at the moment; most of the deals to be had are in whole loan and REO portfolios. And in that market, the funds with loan management experience think they've got the edge. "Our investors are still uncomfortable with the lack of transparency and minimized liquidity of securitized paper," Hanna said. "However, they like the tangible and transparent nature of purchasing whole loans." But even seasoned ABS/MBS types are better than some of the would-be dealmakers Hanna says he's come across recently in the distressed mortgage space -- groups he characterized as "two men and a Bloomberg" or "three buddies playing poker and smoking cigars in Greenwich." "There are unemployed mortgage brokers brokering REO tapes to 'cowboy' hedge funds with a 'buy and hold' or 'buy and flip' approach," he told HW. "I'm baffled as to how these types of strategies/funds will add incremental value and generate alpha without whole loan servicing expertise. "If you acquire Detroit REO at 30 cents on the dollar, what makes one think they will be able to flip the tape for 35 cents in three weeks? If the seller of the real estate knew they could get 35 cents in three weeks they would hold onto the paper or property themselves and sell." Which can mean only one thing: it looks like the crazy days of high-yield junk debt are just getting started.