Several commercial mortgage-backed securities dealers are starting to hedge a portion of their portfolios using the Dow Jones CDX index. "We believe that the liquidity, transparency and diversification of the CDX index make it, at times, an attractive hedging tool for the CMBS dealer community," said Roger Lehman, director of CMBS research at Merrill Lynch.
Although swaps have been the most prevalent hedge for the CMBS industry for five or more years, swaps don't have as much of a credit component as corporate bonds and dealers may want to hedge against a specific credit event, Lehman said. CMBS dealers began using credit default swap and total return swaps last year and hedge funds, portfolio managers and some broker-dealers have been using total return swaps on CMBS indices to hedge their portfolios for several years.
