Editor’s Note: Here’s another analysis of what’s going on with some of the products that life insurers have been considering using to make up for the effects of prolonged low interest rates on the life insurance policies and annuity contracts you sell.
A number of hedge fund firms have a hot product. It’s not their hedge funds.
Och-Ziff Capital Management’s investors withdrew $418 million from its hedge funds in the second quarter. Total inflow of assets under management, however, were $1.2 billion, its largest increase in assets in four years. The firm’s hot product: Collateralized loan obligations — a derivative debt investment that invests in leveraged loans and is a cousin of the type of funds that blew up in the housing bubble.
Like hedge funds, CLOs are supposed to be protected from losing money, particularly now. That’s because they invest generally in floating rate loans, which, unlike normal bonds, won’t lose money when interest rates rise. What’s more, CLOs have also had better returns than other asset classes this year, particularly hedge funds. The Palmer Square CLO Debt index was up 2.5% in the first seven months of the year, compared with 1.5% for hedge funds, according to Hedge Fund Research Inc.
As a result, CLOs, which are also managed by private equity firms as well as other more specialized debt investors, have become one of the hottest products on Wall Street, with inflows continuing to pick up this year, leaving hedge funds far behind. Just more than $69 billion in CLOs — which are like funds but raise money like bonds — were issued in the U.S. in the first half of the year, according to S&P Global Market Intelligence’s LCD. An additional $9.7 billion flowed into the credit derivatives in July. And last month, Wells Fargo predicted that U.S. CLO issuance would hit $150 billion this year, a record.