Why Hedge Funds Are Resurrecting the CDO Trade

The video discusses the compression of spreads on high yield indices and the revival of CDOs, focusing on their appeal to insurance companies seeking high yields. It highlights the differences between pre-crisis and post-crisis CDOs, emphasizing the shift from subprime housing to corporate bonds and loans. The discussion also covers concerns about corporate debt potentially becoming a bubble and the untested nature of CDOs in the current environment. The video concludes with an analysis of the potential performance of CDOs in a downturn and the low default rates observed so far.

What is the primary reason insurance companies are interested in CDOs?

• To reduce their overall risk exposure

• To comply with regulatory requirements

• To diversify their investment portfolio

• To achieve high yields while maintaining safety

How are current CDOs different from those involved in the subprime housing crisis?

• They are based on corporate bonds and loans

• They have higher levels of leverage

• They are not securitized

• They focus on subprime housing loans

What is a major concern regarding corporate debt in the context of CDOs?

• It might lead to a new financial bubble

• It is less profitable than mortgage-backed securities

• It is not attractive to money managers

• It has a high default rate

What is one potential advantage of CDOs in a downturn, according to some money managers?

• They are not affected by rising defaults

• They are immune to market fluctuations

• They have guaranteed returns

• They can perform well due to flexibility in buying beaten down bonds

What is the current state of default rates for CDOs?

• They are very low

• They are unpredictable

• They are moderate

• They are very high