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Why Invest in Arbitrage Strategies: Insights from Harlan H. Simon at Columbia Business School

In this insightful presentation by Harlan H. Simon from Clinton Group Inc., delivered at Columbia Business School on November 8, 2002, the benefits of investing in arbitrage strategies are explored. Highlighting their ability to deliver positive returns irrespective of market conditions, these strategies are uncorrelated with other asset classes, particularly equities. Simon discusses the structural inefficiencies in various sectors that can be exploited and emphasizes the importance of research-driven decisions over transaction-driven approaches. The presentation also covers opportunities in the fixed income market and current trends in mortgage arbitrage, underscoring the positive environment for skilled arbitrage strategies.

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Why Invest in Arbitrage Strategies: Insights from Harlan H. Simon at Columbia Business School

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Presentation Transcript

  1. Presentation to Columbia Business School Harlan H. Simon Clinton Group Inc. November 8,2002

  2. 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

  3. Efficient Markets High leverage No systematic edge Beta return Inefficient Markets Low leverage Systematic edge Alpha return Comparing Efficient and Inefficient Markets

  4. 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)

  5. 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

  6. 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

  7. Assumed 30 Year Conventional Prepayment Curve

  8. Mortgage Trade Example - Yield Table

  9. Mortgage Trade Example - OAS Analysis (Part I)

  10. Mortgage Trade Example - OAS Analysis (Part II)

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