The public markets' equity researchers may garner more television appearances, but there's no shortage of commentary swirling from fixed-income CDO think tanks. Equity tranches within CDOs are the new hot topic for the CDO market, as one bank's research group claims some market documentation is more worthy of the trash can than investors' attention.
"The calculation of these variables is so fundamentally flawed that the results are useless," says UBS' Director Douglas Lucas. His research team's piece looks at market guidance issued about monthly volatility of equity returns, their Sharpe ratio and the correlation of CDO equity returns to the returns of other assets. After careful study, UBS concluded the only historic data that provides insight into future CDO equity performance is the default and recovery of underlying CDO assets. Therefore, current guidance out in front of investors is "is extremely misguided," the UBS report said.