Yield Profiles - How to Interpret Hedging Yields
Hedging yield profiles are useful for understanding how the hedgers are performing, which then allows us to dig deeper into the triggers and parameters that govern the execution of hedges. Hedging models can be grouped and filtered in the same way that client yield profiles can:
- Which hedger is trading the most volume?
- Which hybrid rules are trading the most volume? Which are trading the least? Hybrid Hedging Yields by Rule
- Is this expected?
- What is causing a rule to hedge more/less than others? Hedging Blocks
- Are any specific instruments underperforming? Group By Instrument
- Are any specific rules underperforming?
- Are the hedgers paying too much in spread? Hedging Spreads
- Are there any other LPs we could target to reduce spread paid?
- Can we reduce spread using different hedging instruments (e.g. drivers vs crosses)
Hedging yields are viewed from the house perspective, therefore a positive yield profile is positively yielding for the house. A good yield profile should come onside quickly, a positive 30s hedging yield is considered ideal.
We would usually expect the yield profile to start offside at inception due to the fact the HOUSE is paying spread to external LPs to perform the hedge. The means that positive inception on a chart like seen on the green chart above is where the hedger has been able to earn spread, or trade on crossed spreads in the market. Hedging Spreads