Dresdner Kleinwort Wasserstein and Credit Suisse First Boston separately are considering structuring the first publicly rated collateralized fund obligations on portfolios of hedge funds investments.
Dresdner is looking at structuring a CFO on hedge funds and private equity investments because the number of hedge funds is growing and rating agencies are becoming sufficiently sophisticated to rate these types of deals, said Robin Farrell, head of alternative investments in London. The CFO structures will be attractive to investors because the fund-linked notes provide exposure to hedge funds, which are not normally rated. Both banks' deals are likely to hit the market before year-end, with Dresdner aiming to issue a USD500 million CFO and CSFB shooting for a USD300 million deal. The transactions are aimed at insurance companies, pension funds and debt investors, according to Farrell.
Jim Vos, head of fund-linked products at CSFB in London, said the likely structure would be to set up a special purpose vehicle which would sell fund-linked notes and use the proceeds to invest in a diverse basket of hedge funds. Vos said the portfolio will be an independently managed fund of hedge funds and added that the fund-linked notes are likely to range from triple-A to first loss.
In the Dresdner deal the portfolio could either be a fund of funds or hand picked, Farrell added. The CFO will have a senior tranche of fund-linked notes, a mezzanine tranche, which would give capital guaranteed exposure to hedge funds and a first loss tranche. It will also be structured using an SPV.
John Schiavetta, managing director in structured finance and managed funds at Fitch in New York, said two private CFOs have been structured on hedge fund investments but public deals have yet to hit the market. There are two public deals in the Fitch pipeline, he continued, declined all further comment.
