Dresdner Kleinwort Wasserstein is planning to structure what would be the first collateralized fund obligation referenced to an index of hedge funds. The CFO would reference one of the hedge fund indices, such as HFRX or Morgan Stanley Capital International, which investors can replicate, according to an official. "It's just a question of time," noted the official. Mehraj Mattoo, managing director and global head of alternative investments in London, declined comment.
Replicable hedge fund indices are a relatively new concept, which partly explains why this has not been done before. Rival structurers said it would be hard to shift the first loss tranche of such a deal. In a traditional CFO, referenced to a fund of funds, the-fund-of-funds manager keeps the equity slice. In this deal, Dresdner would likely sell the equity tranche to a high-net-worth individual or portfolio manager, such as an experienced hedge fund manager that wants leveraged exposure without the financing risk, according to the official.
Investors normally borrow money on a three-month basis to leverage their exposure to hedge funds. The problem with this is if there is a credit crunch or liquidity problem the funding rate can spike forcing the investor to withdraw from the fund. "A CFO is leverage for life," said the official.
