Credit Draws In Traditional Managers

Pension funds and other traditional money managers are following the higher-risk players into the credit derivatives market. Tight credit spreads and low vols have forced these traditionally bond-oriented investors to take on incremental risk, according to credit derivatives traders.

The evolution also stems from growing sophistication of traditional money managers and growing confidence in collateralized debt obligations, which have become deeply liquid and offer exceptionally high recoveries. "[Traditional players] ignore the market at [their] own peril," one trader said. "It's toe dipping right now, but a year from now, you're going to see a lot of [CDOs] with real money [investors]. I think they're in it for the long haul."

Names of players and volumes they are investing are unclear. "It is a very private market," said one credit structurer, declining to name individual accounts. "But pretty much everyone you can think of is involved." A CDO research analyst said a relatively constant number of real money players is buying credit-default swaps and synthetic CDOs in greater volumes than before, but declined to provide figures. "For the most part, it is a traditional buy-and-hold strategy," the analyst said.