The Hospitals of Ontario Pension Plan (HOOPP), which manages some CAD19 billion (USD14.7 billion) in assets, is considering purchasing true sale and synthetic collateralized debt obligations of CDOs for the first time. David Long, portfolio manager for derivatives in Toronto, said as it becomes harder to find investments that produce yield the plan is looking to new structures, such as CDOs of CDOs, which can offer attractive spreads. The plan already owns cash and synthetic CDOs.
The pension fund is evaluating both senior and equity tranches of CDOs of CDOs, said Long. HOOPP will plow ahead with purchasing the product if it decides the structures offer both absolute value according to its risk/reward profile and relative value when compared with other credit spread products, he said.
HOOPP is also monitoring the nascent equity-default swap market, but Long's initial view is that the strikes on many of the options are not deep enough out-of-the-money. Equity default swaps are typically one-touch options with strike prices set at 30% of the spot value, however, this does not always equate to a default, he explained. For many of the names being quoted in the EDS market it is conceivable that their stock prices could fall to 30%, but they are a long way from bankruptcy, he said.