Burgeoning demand for exchange-listed structured finance vehicles looks set to spill into the credit derivatives arena. Listed credit funds with cash underlying have taken off in the past year, lapped up by investors who want transparent and managed exposure to diversified markets. Credit officials say synthetics is the next step, spurred on by talk of regulation changes for London-listed funds which will allow greater use of derivatives.
The U.K. Listing Authority is consulting with dealers and fund managers on how to allow listed investment entities to use derivatives to gain asset exposure. "The changes will remove restrictions on short selling and enable greater use of synthetics," said David Cliff, spokesman at the Financial Services Authority in London. The rule changes are part of the adoption of the European transparency directive (DW, 4/21).
Dealers and asset managers in Europe are looking to include equity tranches of synthetic ABS structures and single tranches of corporate collateralized debt obligations in existing and new funds. "We have some deals coming out that will certainly include synthetic investments," said one credit structurer at a U.S. house which sponsors a vehicle.
A number of asset managers are eyeing launches. "Everybody is all over these," said one trader. Cash vehicles have already been launched by big City CDO managers, including Cheyne Capital, Wharton Asset Management and Washington Square Investment Management. CDS will be the next step for inclusion in the funds because the instruments are the most efficient way to achieve credit portfolio diversification, said one structured credit trader.
Some credit officials, however, questioned if there would be sufficient investor appetite for synthetic assets in listed fund form. "Institutional investors already have the resources to build bespoke synthetic portfolios and go through the indices to get diversity," said Miguel Ramos, managing partner at Washington Square, which launched the listed cash CDO fund Carador in April (DW, 4/14).
