More on collateralized fund obligations
CFOs are long-term managed structured finance products issued by a fund of hedge funds manager. The CFO issues several tranches of differently rated debt securities, and then equity securities, offering different risk-return trade-offs. Performance is based on the pool of underlying hedge fund assets. For example, in February P&G Alternative Investments, a fund of hedge funds and CDO group based in Italy, launched a €150 million CFO called Zoo HF 3. Zoo HF 3 has an underlying pool of 52 hedge funds and 14 different strategies. The CFO comprises five classes of debt ranging from triple A-rated to double B-rated, and one unrated equity class. The debt investors receive semi-annual coupons ranging from six-month Euribor plus 40 basis points to six-month Euribor plus 600bp.
The benefits to a fund of hedge funds in raising assets through a CFO are clear. Fabrice Susini, European head of securitization at BNP Paribas, which put together the Zoo CFO, says: "The management costs are lower than in funds of hedge funds, yes, but the main benefit to a fund of hedge funds manager is that, given the maturity of the CFO being seven to 10 years, he can look at investments as long-term without the worry of redemptions by investors."
