Dresdner Kleinwort Wasserstein plans to start selling structured hedge fund notes through syndicates of firms to increase the size of transactions. "This will take the fund derivatives market to a new level," said Mehraj Mattoo, managing director and global head of alternative investments in London. He predicted that a syndicated note could be around EUR200 million (USD195 million), which is four times the size of a typical private placement.
A structurer at a rival firm said the market is not yet mature enough and investors are still looking for bespoke products. But, Mattoo argues that this initiative will open up the market to non-hedge fund specialists, such as equity-linked and credit-linked note investors, and a large issue will offer secondary market liquidity.
DrKW will structure the note and act as the syndication manager, said Mattoo. The firm plans to team up with financial institutions that have a large retail and institutional distribution network, but don't have the structuring expertise. These could include private banks, commercial banks and asset managers, according to Mattoo. The syndication is likely to consist of around three firms. The fees will be split into a distribution fee and a structuring fee.
The firm would likely underwrite the first EUR50 million of the issue. The purpose of underwriting the deal, rather than issuing a smaller note, would be to show investors that Dresdner is happy to put the risk on its balance sheet.
A typical note will be structured using zero-coupon bonds and a call option on a basket of around 40 hedge funds managed by a third party fund manager. Mattoo said the advantage of investing in structured notes over single hedge funds is they give the investor protection against single strategies, such as convertible arbitrage or merger arbitrage, under-performing. "Diversification in a hedge fund portfolio is just as important as in any other portfolio," explained Mattoo.
