Performance analysis of a collateralized fund obligation (CFO) equity tranche

Shady Aboul-Enein (), Georges Dionne () and Nicolas Papageorgiou ()
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Shady Aboul-Enein: HEC Montreal, Canada Research Chair in Risk Management
Nicolas Papageorgiou: HEC Montreal, Finance Department

No 09-4, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: This article examines the performance of the junior tranche of a Collateralized Fund Obligation (CFO), i.e. the residual claim (equity) on a securitized portfolio of hedge funds. We use a polynomial goal programming model to create optimal portfolios of hedge funds, conditional to investor preferences and diversification constraints (maximum allocation per strategy). For each portfolio we build CFO structures that have different levels of leverage, and analyze both the stand alone performance as well as potential diversification benefits (low systematic risk exposures) of investing in the Equity Tranche of these structures. We find that the unconstrained mean-variance portfolio yields a high performance, but greater exposure to systematic risk. We observe the exact opposite picture in the case of unconstrained optimization where a skewness bias is added, thus proving the existence of a trade-off between stand alone performance and low exposure to systematic risk factors. We provide evidence that leveraged exposure to these hedge fund portfolios through the structuring of CFOs creates value for the Equity Tranche investor.

Keywords: Collateralized Fund Obligation (CFO); hedge funds; structured finance; portfolio optimization; performance analysis; multivariate linear regression; systematic risk (search for similar items in EconPapers)
JEL-codes: G11 G23 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2009-07-23
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Related works:
Journal Article: Performance analysis of a collateralized fund obligation (CFO) equity tranche (2013)
Working Paper: Performance Analysis of a Collateralized Fund Obligation (CFO) Equity Tranche (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2009_004

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