|
Introduction to West Side Advisors
West Side Advisors is a boutique investment manager based in New York City
that employs a hedged mortgage-backed securities (MBS) strategy. West
Side seeks to deliver consistent, double-digit annual returns while
avoiding any negative months.
The management team at West Side has broad experience in many aspects of
the MBS business, most recently managing a division of Bear Stearns.
Since 1994, West Side has returned approximately 13.8% per year (net)
with only nine negative months.
The world of fixed income is vast, encompassing U.S. Treasury and Agency
obligations, high-grade and speculative-rated corporate bonds, and
asset-backed debt. West Side Advisors concentrates its efforts in the
fixed income sector that it believes offers the best risk-return
tradeoff – mortgage-backed securities and the bonds derived from their
cash flows.
West Side’s MBS strategy has helped a variety of clients attain
consistent, positive returns throughout a wide range of market
environments. The unique risk/return characteristics that West Side has
achieved creates an excellent complement to traditional fixed-income and
equity investments.
Approach to the Marketplace
WHY THE MORTGAGE-BACKED SECURITIES MARKET
HOLDS SPECIAL APPEAL
1) Youth and size create inefficiencies. Though the Collateralized
Mortgage Obligation market exceeds $1 trillion, it has only been in
existence since the 1980s. The MBS market has yet to achieve the
efficiencies of equities or currencies and therefore presents
opportunities.
2) Mortgage bonds are highly quantitative.
The marketplace lends itself to decision-making based purely on
mathematics. West Side Advisors employs sophisticated quantitative
models, but believes its competitive advantage comes from trading
experience that transcends computer models.
3) Mortgages can be effectively hedged
without giving up yield. This crucial dynamic creates the key to West
Side's historical returns and low volatility. Traditional bonds pay
interest and fall in price as interest rates rise. Mortgage bonds can be
cut into different pieces, including issues that pay interest only.
These bonds appreciate in value as rates rise, the exact opposite of
traditional bonds. Pairing the two together can hedge interest rate
risk, while still generating
meaningful yield.
MANAGING RISK - THE FOUNDATION OF WEST
SIDE’S APPROACH
Interest rate risk is the most
prominent risk in fixed income investing. WSA utilizes mortgage-backed
securities to maintain a portfolio duration near zero. Therefore,
interest rate movements have little or no effect on the portfolio's
principal. Interest rates still affect overall performance as they
relate to the cost of funds, coupon rates, and activity in the mortgage
market.
Credit risk is also a key to managing bonds. West Side invests
almost entirely in Treasurys, U.S. Agency obligations, and highly-rated
non-agency mortgages. Treasurys are backed by the full faith and credit
of the U.S. government, U.S. Agency bonds have an implied government
backing, and most non-agency bonds West Side considers are AAA rated or
have insurance against default.
Prepayment risk occurs in the MBS
market when mortgage prepayments rise and shorten the life of interest
payments. West Side deals mostly with bonds whose underlying loans are
similar in nature and whose prepayment rates are therefore more easily
understood. These mortgages tend to conform to historical patterns of
prepayment not present in larger, less predictable pools of loans.
Leverage risk is assumed when
borrowing money to buy securities. Leverage accentuates positive and
negative returns. West Side Advisors generally employs conservative
leverage of 2-3 times its net asset level. Leverage allows the fund to
take advantage of its ‘positive carry’ – bonds that yield more than the
cost of margin debt. To help
control this risk, West Side Advisors maintains a preferred lending
arrangement with Bear Stearns that offers flexible terms and mitigates
margin calls.
TECHNOLOGY AND EXPERIENCE
Mortgage-backed securities are complex. The asset class attracts
quantitative models and personalities. The West Side management team has
helped create MBS models for Bloomberg and Bear Stearns and continues to
use models to understand the intricacies of each bond and the entire
portfolio. However, the greatest competitive edge West Side employs is
its experience from all angles of the MBS business. By pairing
technology with experience West Side seeks to manage portfolios in the
real world, where events can happen differently than a computer might
indicate.
|