Strategic Hedging & Portfolio Optimization

Our bank clients have a continual need to hedge their Mortgage Servicing Rights. Our MSR team 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:

  1. Duration offset
  2. Convexity offset
  3. 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 more than 30 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.