Products, Services, and Software for Brokers and Lenders Four Methods to Hedge Non-QM & Maximize Profits: In today’s growing non-QM market, selling best efforts is leaving value on the table. Accumulating bulk and improving execution is possible, but it involves taking price risk on the non-QM loans, and this requires hedging. A new technical brief evaluates four primary methodologies used by capital markets professionals: forward sales, correlated hedges, hedging to expected CPRs (i.e., prepayment profile), and hedging to a stochastic model. While forward sales offer direct risk transfer, their utility is limited and it doesn’t offer discernable improvements in execution. Correlated hedges provide a data-driven alternative, but face challenges regarding loan data quality and maturity mismatches. As a result, many capital markets professionals are choosing to align hedges with expected prepayment profiles. The fourth method involves hedging to a stochastic model, a more precise but complex method of valuing and hedging expected future cash flows. The technical paper also highlights an emerging preference for SOFR swaps, by using liquid and easily accessible Eris SOFR Swap futures, instead of US Treasuries. As it is more efficient to forecast and hedge forward rate expectations using the SOFR swap market, it is becoming the benchmark of choice for efficient modeling and hedging. Whether you are managing a small pool or a massive portfolio, understanding these four methods is essential for maximizing your execution and profitability. Read the technical paper and contact John Douglas.
