Presentation to Columbia Business School

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Presentation to Columbia Business School

• Harlan H. Simon
• Clinton Group Inc.
• November 8,2002

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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
• Buyers Market

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Comparing Efficient and Inefficient Markets

• Efficient Markets
• High leverage
• No systematic edge
• Beta return

• Inefficient Markets
• Low leverage
• Systematic edge
• Alpha return

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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)

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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 profitsConsequently, the
  environment is very positive for proper arbitrage
  strategies

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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

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Assumed 30 Year Conventional Prepayment Curve
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Mortgage Trade Example - Yield Table
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Mortgage Trade Example - OAS Analysis (Part I)
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Mortgage Trade Example - OAS Analysis (Part II)