The funhouse mirror of CLO equity hedges
CLO equity cannot be directly hedged, so people are buying approximations and hoping for the best
How many times does a portfolio manager get a chance to turn a 90% loss into a 200% return on investment? That is the promise of a trade on the brashest, riskiest, bargain-basement tranche of a collateralised loan obligation (CLO) – the equity.
But there’s a catch: in order to put on this exciting trade, positions need to be hedged through the next recession. And, given the flotsam and jetsam that CLOs are made up of, that is no easy thing.
“Since you don’t have a perfect hedge because you can
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