Some pretty big guns are aiming to get back into subprime, convinced that either the market is close to bottoming out, or that it has over-reacted. Others still are supremely confident in their ability to seperate the good from the bad. Here at Housing Wire, we’ve been hearing about this for the past few weeks, with different hedge funds firing off presentations outlining a surprisingly similar strategy: there’s got to be value in the subprime mortgage market, and we’re going to find it. I personally doubt that the market in subprime has flushed its losses just yet; but, at the same time, many hedgies say they’ve been sitting on investors’ money — which means some are likely itching to make a bold play in an attempt to generate an outsized return. And going short on subprime is, as many have said, now too expensive a move. “Everyone’s short right now,” said one fund manager, who asked not to be named. What’s a hedge fund with excess capital to do? How about heading back to the ole’ subprime well? Via Bloomberg:

Hedge funds are taking this gamble as the slate of money- making strategies shrinks and profits vanish. Their returns fell 0.5 percent in the first two months of 2008, according to Hedge Fund Research Inc.’s composite index. Managers who specialize in stocks were among the hardest hit as equities markets worldwide tumbled on concern the U.S. economy might be in a recession. … Hedge funds have raised at least $20 billion to take advantage of the housing recession. Goldman Sachs, whose $10 billion Global Alpha fund fell about 40 percent last year, created two distressed-debt pools with a combined $4.5 billion in assets. Pacific Investment Management Co., manager of the world’s biggest bond fund, has raised $3 billion.

Of course, Goldman and PIMCO aren’t alone. The number of funds out to build a distressed-asset play goes well beyond what could probably be covered in this column. $500 million here, $815 million there, a few billion somewhere else — the point is that a ton of that market liquidity that’s been cited as missing is really more likely to be seen sitting on the sidelines, waiting for something akin to “the right moment” to jump in and start buying. It doesn’t take a rocket scientist, of course, to predict that the distressed-debt play is going to be big at some point, even outside of subprime mortgages. Think Alt-A, too. That’s why foreclosure auctions across the nation right now are crawling with much more than real estate investors; you’ll often find hedge fund managers in the audience, carefully noting what’s taking place and attempting to get a feel for when they need to make their play. It’s starting to feel like that moment might be nearing arrival. Which, of course, begs the question: do we really need to be looking to hurriedly push everything over to the GSEs in an effort to restore market liquidity, when that liquidity is already anxiously waiting on the sidelines? I won’t pretend that I have the answer to that sort of complex question, but it’s certainly worth considering. Editor’s note: If you manage a fund that’s looking to get into distressed-assets — and in particular, looking to make a jump into the mortgage markets — send us an email to [email protected]. We’d be interested to learn about your feel for the market, timing and strategy as background for a future story.