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Derivatives

First-Time Investors Shun CDOs

Rising volatility is spooking first time buyers of synthetic collateralized debt obligations, according to fund managers.

Rising volatility is spooking first time buyers of synthetic collateralized debt obligations, according to fund managers. A recent drop in correlation, coupled with rumors of heavy hedge fund losses on the back of the rating downgrades of General Motors Corp. and Ford Motor Co., is forcing greenhorns to rethink the risk exposure of CDO trades.

Dominic Powell, head of the investment solutions group at Henderson Global Investors in London, said, "People are changing their expectations and rewriting the risk involved." He added, "People are still focusing on hedge funds and their position in CDOs and CDS. Investors need better clarification in that area before moving forward."

Structured credit marketers say existing investors have confidence in the structure and there has been no downturn in the market. Mark Lauber, executive director of structured credit at Rabobank, said the investors are informed on market problems but continue to hold positive views of the trades. "From our point of view it's business as usual," he noted, adding, "We are trading for the long term and any short term dislocations could present opportunities."

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