Washington Square Investment Management, a London-based credit fund manager, is in discussions with a potential counterparty about writing derivatives on a listed cash CDO fund it launched last week. Named Carador, the fund invests primarily in equity and mezzanine tranches of cash collateralized debt obligations, and is thought to be the first to be listed on the London Stock Exchange. Listing the fund paves the way for a secondary market in the fund's shares to develop, which in turn opens the door to hedging an option, or constant proportion portfolio insurance, written on the fund.
Miguel Ramos, managing partner, said Washington Square has had preliminary discussions with a potential counterparty, declining to name the firm or whether there is a time-frame for launch. "Keep in mind this has only just launched," he noted. One potential issue is that the fund's stock has a high dividend, which makes it difficult to price options on it attractively. It is also not yet clear how liquid the fund's shares will be. Although Washington Square would not structure capital protection itself--most of its investors are absolute-return investors happy taking a fund's risk--Ramos believes the fund's future development will likely turn around derivative possibilities. "Going forward, it's one of the most interesting propositions," he added.
