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Hedge Funds Exploit CLO Weakness Laid Bare by Corporate Distress

  • CLOs limited in their ability to participate in restructurings
  • Hedge funds arranging distressed deals to siphon value
Updated on

There’s a set of rules in the world of CLOs designed to keep managers’ temptations in check, so that they don’t rush foolishly into overly risky assets. But in a strange twist sparked in part by the coronavirus pandemic, these regulations are suddenly handcuffing them as they try to fend off aggressive Wall Street hedge funds.

Firms from Elliott Management Corp. to Oaktree Capital Management are increasingly profiting from restrictions on collateralized loan obligations that limit their participation in distressed situations. Some investors are even arranging deals that intentionally shift value away from the structures, according to market watchers.