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Derivatives

BroadStreet Structures CFO

BroadStreet Financial Products is structuring a USD500 million collateralized fund obligation on Bucephale's fund of hedge funds. The CFO is referenced to a portfolio of 18 hedge funds, diversified across sectors and regions, according to Andrew Smith, partner at Bucephale in New York.

The CFO is divided into 35% equity and 65% debt. Investors can buy into the equity through two types of 10-year equity-linked notes: a principal protected note which will pay approximately 11% a year and a non-protected note which will pay 22-24% a year.

The equity tranches have a binary pay out. If the net asset value of the fund of funds falls to 75% of its initial value then the equity investors in the non-protected notes will lose all of their investment and the investors in the guaranteed notes will lose the coupon. Smith said Bucephale opted for a binary structure rather than one where money is taken each time there are losses because it wants the product to be able to bounce back after a market crisis, such as Sept. 11. He added that the most an actively managed fund, under Bucephale's direction, has lost is 14%.

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