The bedlam in the residential mortgage market has left a sour taste with a lot of people and companies. But not all onlookers are wailing and gnashing their teeth. Some are sitting back, quietly watching, and waiting for an opportunity to strike.

I'm talking about people who pick through the rubble to find big values -- guys like Sam Zell, who sold off Equity Office Properties to Blackstone (NYSE:BX) at a very opportunistic time and then moved on to buy the beaten-down Tribune. Zell didn't get the nickname "grave dancer" for nothing. And then there's Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) Warren Buffett. Though it may be foolish to bet on the rumored Buffett buyout of Countrywide Financial (NYSE:CFC), it'd be likewise foolish to assume that he's not looking for something to buy at an absurd discount.

From Typhon and Echidna comes Chimera
The attractive returns that can come from buying investment securities -- whether equity or debt -- at heavily discounted prices has attracted the interest of mortgage investment REIT Annaly Capital Management (NYSE:NLY), which is working with Merrill Lynch (NYSE:MER) on the IPO of a new mortgage investment REIT called Chimera Investment. Last Friday, the company filed its initial S-11 filing with the SEC to kick off the IPO process.

The stated objective of the fund is to use the management team's expertise, along with a heavy dose of leverage, to find attractive opportunities in the world of mortgage debt. The strategy isn't all that much different from what Annaly already does, though Chimera does appear to have a greater appetite for risk.

Fear the Chimera
Those up on their Greek mythology (Wikipedia helped me with mine) know Chimera as an unearthly creature that was part lion, part snake, and part goat. As Hesiod's Theogony describes it, the beast "breathed raging fire, a creature fearful, great, swift-footed and strong, who had three heads, one of a grim-eyed lion; in her hinderpart, a dragon; and in her middle, a goat, breathing forth a fearful blast of blazing fire." Well. Such a grotesque and intimidating image is probably a good one for a fund focused on investing in an asset class that's in such sorry shape.

But I found myself questioning Chimera's aim. Though the timing is perfect for a vulture fund of this sort, Chimera's S-11 makes no direct reference to the idea of using current market dislocations to find good assets on the cheap. In fact, though I had to wade through pages upon pages of generic boilerplate risk-factor language, I found that Chimera's filing pays precious little homage to what's currently going on. In fact, the only mention I could find of the market troubles at all came in a small passage on page 45:

Current Environment. The current situation in the sub-prime mortgage sector, and the current weakness in the broader mortgage market, could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing. This could potentially increase our financing costs and reduce our liquidity. If one or more major market participants fails, it could negatively impact the marketability of all fixed income securities, including government mortgage securities, and this could negatively impact the value of the securities we acquire, thus reducing our net book value. Furthermore, if many of our potential lenders are unwilling or unable to provide us with financing, we could be forced to sell our securities or residential mortgage loans at an inopportune time when prices are depressed.

Got that?

Though the fund will be run like a hedge fund and charge a management fee of 1.75% and performance fee of 20%, it will be structured as a REIT. Doing so gives it a definite tax benefit, but it also limits the ownership of any one party to 9.8%. In other words, the structure seems to both provide ample opportunity for Annaly to benefit from the fund through fees and limit its downside through a relatively small ownership position.

Waiting for subsequent filings ...
Curious about what I had read, I called the Annaly investor-relations department for more clarification. Specifically, I was concerned that I didn't see anything in the S-11 regarding Chimera's ability to buy securities from Annaly. The last thing investors want is for Chimera to be the dumping ground for any struggling holdings on Annaly's balance sheet. I also was curious why -- if the opportunities are so great right now -- Annaly wouldn't just raise money itself and get the full benefit.

Of course, companies aren't allowed to communicate much when they're involved in an IPO, and so my call was relatively fruitless. To both questions, I got a "no comment" response and was told to wait for future SEC filings, although it was unclear whether those future filings would address my concerns.

The craze du jour
The mortgage debt market is a massive one, and some great investment opportunities have surely been created out there. However, just because those opportunities exist, that doesn't mean anyone with a few hundred million dollars in fresh equity and a few hundred more in debt can go out and take advantage of them.

The management team at Chimera -- which is strikingly similar to the management team at Annaly -- does have a lot of experience in the industry. However, Annaly's performance isn't particularly comforting. After a sharp run-up from 2001 to June of 2002, the stock has languished and lost about 29% of its value. While this would make me cautious about investing in Annaly, it makes me doubly gun-shy about investing in a new, riskier venture that has no operating history at all.

And though Chimera probably won't even hit the radar of many investors, if the agitation in the credit markets continues, then Chimera isn't likely to be the only fund launched into the eye of the storm. Investors should approach those funds with an equally high dose of skepticism.

The end of the story
In mythology, Chimera ends up dying at the hands of Bellerophon, who flies out of reach of Chimera's fire breath with the help of Pegasus. Will the financial Chimera fare better?

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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. The Fool's disclosure policy is a little dusty on its Greek mythology, but it can quote Billy Madison from start to finish.