WEST PALM BEACH, FL (www.hedgeco.net) – Hedge funds that have purchased interest in the collateralized debt obligation in both the U.S. and Europe worry about the performance of that market. Severalmanagers with positions in such market believe that the returns may be poor, the problem is being attributed to �a deteriorating credit environment–could force a sell off, sending the value of theirinvestments into a death spiral,� according to new reports.
Many experts believe that the widening credit default swap on some companies have ballooned, for instance, the spread for General Motors has increased from 250 basis points to about its current levels at 865 basis points. Such spread has decreased the General Motor�s equity trenches according to news reports.
Funds have recorded several months of losses, Lee McGinty the, European head of credit derivatives strategy at JPMorgan in London said, many hedge funds invested in the CDO�s hoping to hedge the single name exposure, but growing volatility has made such aim difficult. McGinty believes the U.S. markets are worse off because the default correlation is lower than that of Europe. The likelihood that the equity tranches will end up in a default in the US is generally more likely.
Citigroup�s Olivier Renault said that equity trench of CDO�s are generally sensitive to individual name risks. He explained, “What hurts the funds in particular is this idiosyncratic risk,� he also noted that the recent sell-offs will likely reduce the impact of the underperformance, adding, “It would be nice if this idiosyncratic risk would go away.”
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net
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