NEW YORK (HedgeWorld.com)–London-based Barclays Capital, the investment banking division of Barclays Bank PLC, joined forces with Chicago-based Hedge Fund Research Inc. to launch a collateralized fund obligation for institutional investors that want hedge fund exposure.
The CFO, backed by the HFRX Global Tracker index fund, comes in the form of bonds rated as investment-grade by Fitch Inc. Barclays Bank PLC plans to offer two types of bonds, both euro-denominated and with a duration of 10 years.
One, BBB-rated, has a 100% cap on its redemption value, benefiting from a ratings upgrade instead of receiving further returns after this limit is reached. It has a coupon of 6.25% per annum. The other type of note is A- or BBB-rated and gets the full upside of the HFRX index on redemption, with coupons of 5% or 5.5% per annum.
Barclays Bank PLC, rated AA+/Aa1, undertakes to pay the fixed coupon and Fitch rates the redemption payments. Due to this setup, holders of floating rate bonds can swap the coupons into Euribor “plus” with Barclays’ rating.
According to Christian Stoiber, head of Institutional Funds Derivatives Marketing at Barclays Capital, the CFO offers added diversification, especially during times of tight credit spreads.
“The product will appeal to investors such as pension funds and insurance companies who are looking for effective asset liability matching, relying on the attractive risk/return profiles of the hedge fund of funds markets and the capital efficiency of investment grade rated bond investments,” Mr. Stoiber said in a statement.
Investors can redeem the bonds before maturity and receive the value that has accrued in excess of the coupon paid. Barclays indicated it will offer monthly liquidity for the notes at a 1% bid-offer spread and can make weekly valuation available.
The HFRX Global index contains eight strategies: convertible arbitrage, distressed securities, event-driven, equity hedge, equity market neutral, macro, relative value and merger arbitrage.
Investable hedge fund indexes, introduced by several firms in the past one to two years, have spawned a variety of derivative products (see ).
Contact Robert F. Keane with questions or comments at: