Tranchelet trading on the investment grade corporate CDX index has picked up in the past few weeks as dealers have looked to hedge issuance of bespoke collateralized debt obligations. Tranchelets are very thin slices of index equity tranches which first hit the market as a risk management tool (DW, 1/6).
A handful of firms including Lehman Brothers, Merrill Lynch, Goldman Sachs, Morgan Stanley andJPMorgan are quoting two-way prices in the U.S., but tranchelet protection is predominately bought as a more precise way of hedging bespoke CDO issuance. "As more bespoke deals happen there is a need for bespoke desks to have a better finer hedging tool for these risks," said one dealer. Traders said tranchelets are not often traded on a speculative basis due to uncertainty over correlation risks and sensitivities, although some hedge funds with large CDO books have made relative-value plays to capitalize from possible mispricing.