The degree of trading flexibility given to third-party synthetic collateralized debt obligation managers is tipped to increase. Arrangers are looking to allow managers to use more long/short strategies and curve plays, such as steepeners, in underlying credit portfolios. "Dealer correlation desks are realizing straight forward portfolio constraints are not what the investment community is looking for any more," said one London-based credit structurer.
At present, the majority of managed CDOs only allow managers to trade out and substitute deteriorating credits. This may change, however, as the economic interests of managers and the performance of the underlying portfolio become increasingly aligned. "The higher the alignment of interest, the higher would be the manager's trading flexibility," wrote analysts at Fitch Ratings in a recent report.