Lesson 4 of 25 · 6 min

Why the blended number also hides the government fund

The quiet row is a sixth of the wealth and a quarter of the collateral, which is the same trick run the other way.

The short-duration government fund is the high-advance row. Market value $951,390, advance rate 85 percent, lending value $951,390 × 0.85 = $808,681.50. As a share of the pool it is 951,390 ÷ 6,032,795 = 15.77 percent of market value and 808,681.50 ÷ 3,277,251.25 = 24.68 percent of lending value. It gains almost nine points in the walk Calder lost.

The blend hides this too, and for the same structural reason. 54.32 percent sits far below 85, so a reader who treats the blend as typical understates how much of the lending value lives in the government sleeve. A quarter of the collateral is a fund whose price is mostly duration, not equity residual. That is a different exit from Meridian or Calder, and the summary line cannot say so.

The two hides work as a pair. Calder is over-represented in market value and under-represented in lending value. The fund is the opposite. The average is what remains after those two distortions offset. Offset is not cancellation: the dollars still sit in different order books. A month in which Calder falls and the fund does not will change the blend and the collateral in opposite-looking ways, which lesson 13 takes up.

Haircut language makes the same fact louder. The fund's haircut is 1 − 0.85 = 15 percent. Calder's is 65 percent. One row withholds about one dollar in seven; the other withholds about two dollars in three. Folded into 54.32 percent, both withholdings become a single leftover of 45.68 percent, which is nobody's haircut either.

A high-advance row inflates its share of lending value. That is not a gift. It is the same weighted-average machine, running with the sign flipped.

Key terms

High-advance row: A holding whose advance rate sits well above the blend, so it is larger in lending value than in market value.
Offset in the average: A low-advance name and a high-advance name pulling the blend in opposite directions. The pulls can net; the exits do not.
Haircut: One minus the advance rate. The fund's haircut is 15 percent; Calder's is 65 percent.

Worked example

The government fund on two denominators

Short-duration government fund, March close. Market value $951,390 at 85 percent. Pool totals $6,032,795 and $3,277,251.25.

Fund as a share of market value: 15.77%
Fund lending value: $808,681.50
Fund as a share of lending value: 24.68%
Share gained in the walk: 8.91 points
Haircut on the fund: 15%

Nine extra points of collateral share came from a fifteen-point haircut on a sixth of the book.

Check yourself

The government fund is $951,390 at 85 percent in a $6,032,795 pool whose lending value is $3,277,251.25. What are its two shares, and what happens to a reader who treats 54.32 percent as the fund's rate?

Saved in this browser only. No account, nothing sent anywhere.

Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.