The revolution in collateralized debt obligation instruments just took another turn, as that market awaits the debut of cutting-edge CDOs backed by hedge fund debt and municipal bonds, among other possibilities.

Ferrell Capital Management is now pre-marketing $50 million of unrated junior notes that are in part based on the performance of a group of hedge funds. Ferrell's deal program is considered the avant garde of the CDO market, as it is less legally comprehensive than a typical CDO, yet retains the basic structure. However, other deals are in the works that could make the Ferrell program seem passe: in particular, CDOs backed and managed entirely by hedge fund managers. (CDOs basically bundle cash-flow producing debt obligations into a synthetic structure.)

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