Deer Park Road Management, a Colorado-based hedge fund known for its profitable trades in legacy subprime mortgages, is having its worst year since inception.

The firm’s STS Master Fund posted gains of just 3.41% through September, a wide departure from its double-digit gains in years prior, according to an investor letter seen by Absolute Return. The fund had three down months this year, most recently in September when it posted a 0.31% loss. The Absolute Return Mortgage Backed Securities Index is up 4.34% through September.

The smaller SBF Opportunities fund posted gains of 0.52% for September, bringing its year-to-date performance to 4.16%. The biggest contributor to September performance was an asset referred to as “wine-cellar” bonds, though Deer Park does not elaborate on the nature of these securities.

Deer Park did not return a request for comment.

Since its inception in 2008, Deer Park’s master fund has delivered outsized gains. The fund posted double digit returns for six consecutive years, ranging from just under 50% in 2009, to almost 27% in 2014.  In that time, the fund did not have a single down month.

In January, Bloomberg reported that Deer Park was being investigated by U.S. regulators over the valuation of infrequently traded bonds like mortgage-backed securities, but the firm was not accused of any wrongdoing.

Deer Park trades in several different sectors but it is heavily weighted towards legacy residential mortgage-backed securities or RMBS.

“The legacy RMBS sectors continue to be a bright spot of favorable fundamental collateral performance,” the firm wrote in a September letter to investors. “The ongoing deleveraging of these seasoned deals…has provided stable cash-flows and strong returns.”

Recent spread compression in credit sectors during a higher interest rate environment is attributed to “more transitory and technical effects, specifically an abundance of cash needed to be invested.”

Deer Park expects spreads in the corporate and leveraged loan markets to widen as the Federal Reserve continues its path toward policy normalization.

“The impact will ultimately serve to increase borrowing costs for many of these asset classes, in particular for corporate bonds and leveraged-loan markets, as debt maturity events in the upcoming years will require repayment or refinancing of existing obligations,” the firm wrote.

Alternative A-paper mortgages, which sit somewhere between prime and subprime mortgages, were one of the biggest performance contributors in September, accounting for 45% of the portfolio’s return.

Deer Park is bullish on the legacy non-agency RMBS market – transactions made up of loans that were typically originated prior to the 2008 crisis and not guaranteed by government-sponsored entities – due to a stable housing market and consistent returns.

“Demand for the product has been so strong that we have increasingly looked to lever our broker network to buy product rather than compete for bonds at auction,” the letter states.

Deer Park Road on track for worst performance on record on Absolute Return.