Providing diversification through prepayment alpha

Agency Mortgage-Backed Securities (MBS)

Since 2010, Cello’s Agency MBS strategy has provided clients access to prepayment alpha in the $6 trillion Agency MBS market, with a focus on Collateralized Mortgage Obligations (“CMO”). Cello’s Agency MBS strategy focuses on monetizing mispriced prepayment risk. Prepayment risk has inherently low correlation to other major asset classes, and Cello’s disciplined approach to managing prepayment beta through interest rate cycles has reduced this further. The Fund’s correlation with the S&P since inception has been negligible. Cello actively seeks to reduce interest rate and convexity risk through hedging with interest rate futures, options, or other Agency MBS.

Agency MBS carry the credit guarantee of the United States government or government-sponsored agencies: Ginnie Mae, Fannie Mae, and Freddie Mac. Agency MBS offer higher yields in return for the cash flow uncertainty arising from borrowers having the option to pay off their mortgages ahead of schedule (“prepayment”). Borrowers exercise this option most notably through refinancings, but also through home sales and foreclosures. Factors driving prepayments include a range of loan and borrower attributes and regulations. Opportunities arise from divergent views on prepayments and from variations in bond structures. Investing in this strategy requires specialized expertise in prepayment modeling, substantial technology and analytics infrastructure, and experience in OTC markets.