Are Credit-Linked Notes Dangerous for Public Funds?

Public investors that have restrictions participating directly into credit swaps or desire access to a diverse pool of credit investments are choosing to invest some capital in credit-linked notes (CLN). Public pensions such as CalPERS have classified credit-linked notes as an opportunistic asset class given the historical level of risk associated with structured investments. In Europe, cash-focused public pension funds have been gobbling up CLNs. Historically, credit-linked notes have been purchased by financial institutions, high net worth individuals, and opportunistic institutional investors. CLNs tend to have higher yields and customized maturity structures, a unique benefit for smaller pension funds, but not for investors keen on liquidity. The lack of counterparties makes it challenging to get out of credit-linked note trades. Banks like credit-linked notes because they can effectively sell certain credit exposures.

Are synthetic credit products making a comeback?

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