Fund derivative desks are picking up protection-writing on credit hedge funds, targeting credit investors looking to get extra returns from current tight spreads. "There's good demand for credit funds with true active management," noted one fund-linked structurer. A lack of established long/short credit funds with proven returns (DW, 3/31), however, means there is a limit to the business that can be done in the sector, he noted.
Credit desks have been jumping into the melee, solving the problem by structuring capital-protected credit funds from scratch and adding a manager. But a fund-linked salesman at a U.S. firm noted once investors have paid out for the cost of capital protection, plus management fees, these funds have to be highly structured to produce the returns investors are looking for. "There has been a plethora of credit-linked [constant proportion portfolio insurance] deals in the last few months," he said, noting more and more of these deals are coming out with short credit buckets to boost yield.
