If the end of the world is near for the credit markets, word hasn’t reached Durham, North Carolina. The city is home to $26 billion institutional money manager Smith Breeden Associates. To the firm’s top executives, the current turmoil offers the chance of a lifetime. “This is a multigenerational opportunity,” says Daniel Dektar, Smith Breeden’s chief investment officer.

Now, says Dektar, buyers can acquire high-quality assets at fire-sale prices in the mortgage-backed-securities market. Smith Breeden is even dipping into the subprime sector, where the credit crisis first took hold. The firm, which runs about $2.3 billion in absolute-return strategies, is ...