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Derivatives

Hedge Fund To Kick-Start European CDO Secondary Market

U.S. hedge fund manager Christofferson Robb & Co. plans to launch what is believed to be the first hedge fund that will trade cash and synthetic European collateralized debt obligations and asset-backed securities in the secondary market. The fund, dubbed the CRC Global Structured Credit Fund, is set to launch in September with approximately USD100 million under management, according to an official familiar with the plans. The size of the fund's assets could not be determined by press time. Officials at CRC declined comment.

CDO bankers in London welcomed the move, saying this could kick-start an active secondary trading market. At the moment firms will typically offer to buy back CDOs they have structured for clients, but are reluctant to purchase CDOs structured by rivals because of a lack of transparency. In addition, clients usually only want to sell CDOs when they are tanking. Alistair Mullen, credit derivatives marketer at ABN AMRO in London, said, "There is minimal liquidity in the secondary market, so to have someone in this space can only be a benefit."

Glenn Blasius, managing director and European head of asset-backed and mortgage-backed securities at Bear Stearns in London, also expects the new fund to contribute to liquidity. "The European market is much smaller than the U.S. market, but as it grows in size it will grow in liquidity."

The fund is a response to the deteriorating credit environment, said the official familiar with CRC's plans. Conservative investors that last year bought CDOs are looking to unwind their positions as the credit markets head south, but are finding it increasingly difficult to sell their positions now the CDOs are being downgraded.

The fund will trade around events, such as downgrades and expected downgrades. Its four main strategies will be buying asset-backed transactions at issue, buying notes that may get upgraded or downgraded and trading on market inefficiencies, such as inaccurate reports.

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