Hedge funds looking for outsized returns are beginning to get creative as they assess the wreckage of not only the mortgage marketplace, but local housing markets as well. The latest example is Three Arch Partners, which is readying a fund to snap up abandoned land in hard-hit California, according to a report published Tuesday in Financial News. The fund is looking to launch the aptly-named California Distressed Land Fund with $150 to $250 million — a small fund, to be sure, but one that the company is pitching as an alternative commercial property funds or residential property index derivatives. The fund expects to hold the land through 2010 to 2014, the Financial Times said, citing IGS Group managing partner John Godden. IGS is promoting the fund. The land pitch comes in stark contrast to the increasingly crowded marketplace for mortgage assets, which features some large players jockeying for position as well as growing number of smaller funds looking to find pockets of value at smaller capital levels. Among the larger players in the sapce, BlackRock Inc. (BLK), the biggest publicly traded U.S. asset manager, said in March it was backing a new company called Private National Mortgage Acceptance Co. LLC, also known as PennyMac, that will buy mortgages at a discount and look to make money in the so-called scratch-and-dent business. PennyMac has a $2 billion war chest to step in and start buying, and will bankroll its own in-house servicing platform; in May, BlackRock also negotiated a deal to snap up $15 billion in mortgages from Swiss bank UBS AG (UBS). Beyond BlackRock’s move, Marathon Asset Management, LLC, a global investment manager with $10.6 billion under management and over $20 billion in assets, is also buying up distressed mortgages and is also pumping the mortgages it buys to its own captive servicing operation, Phoenix-based Marix Servicing, LLC. Disclosure: The author held no positions in BLK or UBS when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.