Despite the race to launch and price the first hedge fund-of-fund CDO by year-end, 2001 has come and gone, and first quarter 2002 is the new target.

Morgan Stanley, JP Morgan, and Credit Suisse First Boston are all contenders for the first "true" hedge fund of fund CDO deal.

Via securitization, banks contribute to their hedge fund clients' assets under management as well as to the hedge fund industry overall.

Nevertheless, although some parties are pushing the market-value fund-of-fund product hard, some professionals remain skeptical as to whether the asset class will see meaningful deal flow.

In theory, one monoline source feels more comfortable with the private equity fund-of-fund CDOs, which have more tangible assets than various hedge fund positions, but remains undecided whether their firm will commit to deals using either structure in 2002. The fund-of-funds deals have their skeptics at the dealer level as well, with several bankers seeing the product as an uphill battle versus the relatively quick execution of arbitrage cashflow deals backed by tangible assets such as loans and bonds.

Deal pipeline firms up

Morgan Stanley is prepping a $300 million-area market value, hedge fund-of-funds CDO for Grosvenor Capital Management, slated to launch this quarter. Although private equity fund-of-funds deals are becoming more prevalent, Grosvenor's deal will be backed by the returns from a diverse group of hedge funds that use various strategies.

Chicago-based Grosvenor has $3.6 billion in assets under management, and is an affiliate of Value Asset Management Inc. VAM is a subsidiary of BankBoston Corp.

Still in the pipeline is a hedge fund-of-fund deal from Ivy Asset Management, a subsidiary of Bank of New York. The deal is being structured out of JPMorgan's London office. Europeans have proven to be more open to the fund-of-fund deals, as demonstrated by Deutsche Bank's placement of the private-equity backed Prime Edge transaction in Europe last year. Although the $300 million, five-year bullet had its equity and debt investors circled this past summer, Sept. 11 jolted some of the key equity investors that ultimately dropped out of the deal, delaying the issue until first quarter.

Although Ivy reportedly has enough equity placed to do an $80 million to $100 million transaction, JPMorgan is committed to bring a $300 million-area transaction, buyside sources familiar with the situation said.

Ivy is structured as 40% triple-A, 10% double-A, 7.5% single-A, 5.5% triple-B, 7% double-B, and 30% equity. Both Moody's Investors Service and Standard & Poor's are rating the issue. The transaction will largely involve Ivy's long-short equity fund, Rising Star, and its flagship relative-value fund, Rosewood Associates.

Credit Suisse First Boston's London office continues showing investors a $500 million, five-year bullet, market-value hedge fund-of-fund CDO deal for the Bahrain- based Invest Corp. The trade is said to have four tranches, all of which are structured as five-year bullets. Fifty percent are triple-A notes and 25% percent of the deal is preferred shares.

Ferrell Capital is one of the few firms that have closed, at least, a quasi-hedge fund-of -fund CDO. The firm's $200 million Concert Series II, Ltd, which included $150 million in swap financing, closed in November 2001. The asset manager is AIG International Relative Value Fund and Links Securities acted as placement agent.

On the market-value private-equity fund-of-fund side, the Carlyle Group is said to be shopping a new deal.

Although these hedge fund-of-fund deals are, in theory, mark-to-market, the net asset values (NAVs) are supplied by the fund-of-fund manager, who is audited on a quarterly basis, noted one rating source. Actually getting a bid on the hedge funds assets or positions is too cumbersome to truly mark to market, he added. Nevertheless, the market value of the transaction's assets must always be greater than its liabilities.

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