Strategic Hedging & Portfolio Optimization
Our bank clients have a continual need to hedge their Mortgage Servicing Rights.
Our MSR team, headed by Bob Koets, helps them deliver consistently strong MSR hedge
results. For each client, our goal is to deliver exemplary service and performance,
leading to a high level of satisfaction and long-term relationships. A major weakness
of many MSR hedging programs is taking a "cookie cutter" approach with a limited
number of hedge instruments.
Our three-step approach to hedging MSRs consists of:
- Duration offset
- Convexity offset
- Optimization
Many hedgers and outsourcers stop after step 2. Instead of using a standard mix
of duration and convexity instruments, we look for the best hedge portfolio given
every available instrument in the marketplace. Our 25 years of fixed-income, relative-value
money management expertise gives us a unique platform to apply to the MSR risk management
process.
By constructing the optimal relative-value hedge portfolio considering not only
interest rate risk but also basis risk, volatility risk, modeling risk, option skew,
and performance over multiple horizons, we can provide an effective offset to our
client's MSR risk, and increase the odds that the hedge will actually outperform
its modeled performance.