Transcript Harlan Simon-Clinton Group

Presentation to Columbia Business School
Harlan H. Simon
Clinton Group Inc.
November 8,2002
Why Invest in Arbitrage Strategies?
 Ability to present positive return profile regardless of general market
conditions
 Uncorrelated to other asset classes, particularly equity
 Certain sectors may present structural inefficiencies to exploit
 Research, not transaction driven
 Buyer’s Market
CLINTON GROUP (1)
Comparing Efficient and Inefficient Markets
 Efficient Markets
 Inefficient Markets
 High leverage
 Low leverage
 No systematic edge
 Systematic edge
 Beta return
 Alpha return
CLINTON GROUP (2)
Arbitrage Opportunities in the Fixed Income Market
 Market segmentation
 Participants may not have equal access to all markets
 Differing investor preferences
 Unanticipated market events
 Structural considerations (i.e. tax related issues)
CLINTON GROUP (3)
Current Arbitrage Environment
 Highly leveraged strategies are limited
 Probably less money invested in arbitrage strategies vis a vis 1998
 Dealer activity reduced - equity investors do not pay for trading profits
Consequently, the environment is very positive for proper arbitrage
strategies
CLINTON GROUP (4)
Arbitrage Opportunities in the U.S. Mortgage Market
 Various prepayment assumptions dictate dramatic
differences in price
 Different interest rate modeling techniques dictate
differences in price
 Securities change characteristics under differing market
conditions
CLINTON GROUP (5)
Assumed 30 Year Conventional Prepayment Curve
CLINTON GROUP (6)
Mortgage Trade Example - Yield Table
Deal: FHR2089.SA
Collateral Type: PC_GOLD
Gross Coupon:
7.441
Net Coupon:
7.000
Original WAM:
Current WAM:
Age:
360
347
13
Method: CPR
Custom Prepay: OFF
Delay: 14
1M PSA: 1482
3M PSA: 1726
6M PSA: 1726
9M PSA: 1726
1Y PSA: 1726
Life PSA: 1726
Tranche:
FHR2089.SA
Description:
SUP_AD_INV CT:10 11 12
Coupon:
Floater Formula:
34.27% + -4.67 x LIBOR_1M
Cap:
34.26667%
Floor:
First Payment:
01-15-99
Accrued Days:
7
Accrued:
Issue Balance:
12,900,000
Original Face:
Price:
100.1250
Factor:
0.958311359
Current Face:
8.4345
0.00000%
0.1640
8,250,000
7,906,069
--------------------------------------------------------------------------------------------------------------------------Price
5%
10%
15%
20%
25%
30%
35%
40%
------------------------------------99.625
99.750
99.875
100.000
11.482
11.450
11.417
11.385
11.508
11.459
11.411
11.362
11.766
11.557
11.349
11.142
12.038
11.658
11.282
10.908
12.197
11.720
11.245
10.772
12.333
11.770
11.213
10.659
12.445
11.813
11.186
10.562
12.551
11.853
11.160
10.471
100.125
11.353
11.314
10.935
10.535
10.301
10.107
9.941
9.785
100.250
11.320
11.266
10.730
10.163
9.832
9.558
9.323
9.102
100.375
11.288
11.218
10.525
9.793
9.364
9.011
8.708
8.422
100.500
11.256
11.170
10.321
9.424
8.899
8.466
8.095
7.746
100.625
11.225
11.123
10.118
9.060
8.435
7.924
7.485
7.073
--------------------------------------------------------------------------------------------------------------------------Avg. Life
6.678
4.049
0.685
0.361
0.283
0.241
0.213
0.193
Mod. Dur. 3.874
2.587
0.605
0.335
0.265
0.226
0.201
0.182
First Payment 01-15-99
01-15-99
01-15-99
01-15-99
01-15-99
01-15-99
01-15-99
01-15-99
Last Payment 03-15-13
08-15-10
09-15-02
10-15-99
07-15-99
06-15-99
05-15-99
04-15-99
Spd over Tsy 675
675
638
603
581
563
547
532
---------------------------------------------------------------------------------------------------------------------------
CLINTON GROUP (7)
Mortgage Trade Example - OAS Analysis (Part I)
CLINTON GROUP Inc.
OAS SUMMARY RESULTS
Tue Jan
5 12:33:32 1999
Deals analyzed in this run:
Deal info: FHR2089 Re-Remic PC_GOLD 7% WAC: 7.4% WAM: 344
500 paths; random seed: 96581. Periods of: 1 month(s); Long term driver: 7 year
Short-term Rate Volatility:
14.00%
Curve used:
Treasury:
Libor:
Spread:
1m
4.32
5.08
76
3m
4.37
5.06
69
6m
4.44
5.02
58
Prepayment method used:
Prepayment method used:
Prepayment method used:
1yr
4.46
4.99
53
2yr
4.46
5.00
54
3yr
4.46
5.02
56
4yr
4.45
5.13
68
5yr
4.45
5.15
70
7yr
4.50
5.24
74
10yr
4.57
5.33
76
20yr
4.80
5.56
76
30yr
5.04
5.66
62
100% of DEFAULT Relative Coupon
150% of DEFAULT Relative Coupon
75% of DEFAULT Relative Coupon
CMOTR: FHR2089.SA, SUP_AD_INV CT:10 11 12 , Amount: 8,250,000, Factor: 0.7736,
Deal info: FHR2089 Re-Remic PC_GOLD 7% WAC: 7.44% WAM: 347
Security
Coupon
Gross Coupon(1/4)
Convnt: 6.87/ 6.46
GNMA:
6.63/ 6.16
Accr. Curve
Intr. Used
INV Formula: 34.3% + -4.67 x LIBOR_1M,
Cap: 34.3%,
Floor: 0%
Price
OASderv
OAS $/100bp
Effective Duration Results Convex
Avg% Av$/Hbp Up$/Hbp Dn$/Hbp $/bp2
******Constant Scenario*******
Yield Margn Spr/AL AvgLf Durtn
Forward Scenario Vol
Yield Margn AvgLf cost
FHR2089.SA
8.43
0.539 Libor 100.1200
288 -2.2981
9.29
9.3513
12.06
6.6474
-10.8
11.36
628
620
5.16
3.23
10.46
521
5.91 -233
FHR2089.SA
8.43
0.539 Libor 100.1200
291 -1.0481
7.76
7.8144
11.13
4.4967
-13.3
11.18
610
617
0.83
0.74
11.60
659
0.87 -369
FHR2089.SA
8.43
0.539 Libor 100.1200
360 -3.0154 10.72
10.79
13.11
8.4744 -9.269
11.37
629
614
6.67
3.85
10.40
513
6.68 -153
CLINTON GROUP (8)
Mortgage Trade Example - OAS Analysis (Part II)
CLINTON GROUP Inc.
OAS SUMMARY RESULTS
Tue Jan
5 12:39:28 1999
Deals analyzed in this run:
Deal info: FHR2089 Re-Remic PC_GOLD 7% WAC: 7.4% WAM: 344
500 paths; random seed: 96581. Periods of: 1 month(s); Long term driver: 7 year
Short-term Rate Volatility:
14.00%
Curve used:
Treasury:
Libor:
Spread:
1m
4.32
5.08
76
3m
4.37
5.06
69
6m
4.44
5.02
58
Prepayment method used:
Prepayment method used:
Prepayment method used:
1yr
4.46
4.99
53
2yr
4.46
5.00
54
3yr
4.46
5.02
56
4yr
4.45
5.13
68
5yr
4.45
5.15
70
7yr
4.50
5.24
74
10yr
4.57
5.33
76
20yr
4.80
5.56
76
30yr
5.04
5.66
62
100% of 12M_RMP Relative Coupon
150% of 12M_RMP Relative Coupon
75% of 12M_RMP Relative Coupon
CMOTR: FHR2089.SA, SUP_AD_INV CT:10 11 12 , Amount: 8,250,000, Factor: 0.7736,
Deal info: FHR2089 Re-Remic PC_GOLD 7% WAC: 7.44% WAM: 347
Security
Coupon
Gross Coupon(1/4)
Convnt: 6.87/ 6.46
GNMA:
6.63/ 6.16
Accr. Curve
Intr. Used
INV Formula: 34.3% + -4.67 x LIBOR_1M,
Cap: 34.3%,
Floor: 0%
Price
OASderv
OAS $/100bp
Effective Duration Results Convex
Avg% Av$/Hbp Up$/Hbp Dn$/Hbp $/bp2
******Constant Scenario*******
Yield Margn Spr/AL AvgLf Durtn
Forward Scenario Vol
Yield Margn AvgLf cost
FHR2089.SA
8.43
0.539 Libor 100.1200
334 -0.8687
5.66
5.6938
8.6818
2.7058
-12.0
11.16
608
616
0.81
0.69
11.32
626
0.93 -292
FHR2089.SA
8.43
0.539 Libor 100.1200
526 -0.2892
2.42
2.4327
3.8334
1.0320 -5.603
10.77
569
571
0.29
0.27
11.12
608
0.29
FHR2089.SA
8.43
0.539 Libor 100.1200
347 -1.7769
7.41
7.4626
10.98
3.9455
11.33
625
628
3.30
2.17
10.70
550
3.42 -202
CLINTON GROUP (9)
-14.1
-82