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Should You Worry About CLOs in Your Funds?

Cracks in the underlying bank-loan market are spawning worry over this market.

Should you worry about collateralized loan obligations in your funds? The short answer is probably not.

As a reminder, CLOs are securities backed by pools of leveraged bank loans. Like many structured products, CLOs are sliced up into tranches with different levels of subordination so that higher-rated tranches are protected from loss by lower-rated pieces that will suffer first when there are defaults among underlying loans. Collateralized loan obligations also have managers who are responsible for assembling the pool, and usually reinvest the portfolios over a certain period when loans are repaid.