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...As A New Breed Of Investors Arrives

Two new types of investors have emerged this year to take advantage of the potentially huge rewards the secondary market in structured credit products has to offer. Hedge funds and principal finance desks have been popping up in both Europe and the U.S., keen to grab a share of the huge spreads on offer. At the start of the year, traders were reporting CDOs trading 25% below their theoretical value. The CDOs were trading at such low levels because there were only a handful of players willing to make markets, according to fund managers. Spreads have come in as more funds have set up, but liquidity has also increased and this is starting to be a fruitful market.

Two of the best known credit derivatives professionals, Jonathan Laredo, former head of structured finance for Europe and Asia at JPMorgan, and Charles Pardue, a former managing director who spent over 10-years at JPMorgan and headed various structured finance groups, both set up structured credit vehicles. Laredo has teamed up with fellow Bankers Trust alumni Geoff Smailes, former member of Credit Suisse First Boston's global emerging markets management committee, and Tim Gledhill, former co-head of structured credit trading at Merrill Lynch in Europe. Pardue's Prytania Group is more of a traditional asset manager, but it will deal heavily in the credit derivatives arena.

Several of the major derivatives houses, including Merrill Lynch, Goldman Sachs and Banc of America Securities, set up principal finance arms to trade secondary market CDOs. In addition, Deutsche Bank's Winchester Capital Principal Finance ramped up its assets, ending the year with around USD15 billion, according to Scott Eaton, co-head in New York.

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