CDOs provide flexible financing in down markets
This spring didn't look like an auspicious time to offer a loan fund, as the downgrades of both General Motors and Ford Motor to junk status touched off turmoil in the leveraged credit and credit derivative markets.
McDonnell Investment Management's Loan Opportunity Fund offshore, which launched in April, initially bore out such sentiment. In its first month of operation, the fund reported a negative net return of 1.31%.
But then the benefits of a neat financing tool - term leverage - kicked in. While many funds had to sell into this spring's downturn, either because of investor redemptions or because dealer-provided leverage was called in, the McDonnell strategy - which has the capacity to raise $70 million in equity - swooped in to buy up leveraged bank loans and junk bonds, and did so with increasing leverage.
The McDonnell fund rose 0.58% (net) in May as...