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Derivatives

CDO Equity Funds Catch On

Delegates and panelists were buzzing about funds of equity tranches from synthetic collateralized debt obgligations.

Delegates and panelists were buzzing about funds of equity tranches from synthetic collateralized debt obgligations. About eight CDO equity funds are in various stages of marketing and development andTCW Asset Management is about to bring its first deal, a credit official told DW on the conference sidelines. The TCW equity fund will manage predominantly equity from deals the firm has already issued, he added. Further details could not be ascertained.

In addition to established CDO managers such asBear Stearns Asset Management and BlackRock, hedge funds are also looking to enter the role of equity manager. More managers are looking to garner fees from managing the first-loss slice because equity-tranche trading volumes have jumped in the past year. "I have seen equity trade hands two to three times over the course of four months," said a credit trader at the conference. "Last year you would have never seen that," he added.

Marketing, the funds however, has been a challenge for credit sales officials pushing the funds to real money accounts. "There are a lot of questions about where this type of investment should go--into their fixed income or alternative investment portfolio," noted one head of credit sales at a U.S. based firm.

Increased demand for equity from these funds has also jump-started requests for equity tranchelets, where the first-loss piece is further sliced. Tranchelets have traded on the credit derivative indices mostly as a risk management tool for off-setting bespoke tranches of CDOs.

 

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