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The machines are coming and want to manage your CLOs
April 2021 | Issue 233
Sayed Kadiri headshot
Sayed Kadiri
The CLO market has been slow to accept technology, but an initiative being put together by quantitative fund manager Two Sigma could radically change this. Sources say the New York-based firm is planning an artificial intelligence platform to help perform CLO management duties.
It is unclear how Two Sigma intends to operate this platform. But the $58 billion fund manager is well placed to provide tech solutions, given its emphasis on AI, machine learning and distributed computing. A spokesperson declines to comment.
CLO investors have told Creditflux that an AI platform for CLO management is viable given that CLOs are rule-based products that must operate within strict investment parameters.
“Theoretically, technology can be used to identify suitable loan investments for a CLO and factor in expectations for future loan prices,” says a CLO fund manager at a firm which claims to have incorporated tech into its systems to parse emails and news with a view to collating data on CLO managers.
“Manual execution is the biggest burden in the current CLO market”
Olga Chernova, Chief investment officer | Sancus Capital Management
Applicable margin resets, which are designed to make CLO refinancings more efficient, have been one of the biggest advances made by the industry in recent years. The take up has been relatively low, but AMR auctions have been on the rise, with four so far in 2021.
Sancus Capital Management was one of the driving forces behind the AMR concept and chief investment officer Olga Chernova says there is scope for tech-enabled CLOs, but they can’t run entirely without human involvement.
“We like all things innovative,” she says. “Index-like CLOs that follow a set of pre-defined allocation rules have been talked about since 2007 and it could give investors some interesting options.
“We see the main roadblock to lightly managed CLOs is that they still require a human and quite a bit of effort to execute trades. The manual and time-consuming nature of execution is the biggest burden in the current CLO market.”
CLO managers often use AI to support them operationally, with companies such as KPMG and Sky Road offering solutions. But these are typically used to filter the loan market for eligible investments and put them forward to CLO portfolio managers as suggestions.
Two Sigma does not have a CLO management platform and, therefore, is likely to rely on algorithms to identify and make trade decisions. Humans could be used solely to execute these trades.
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Global credit funds & CLO's
April 2021
| Issue 233
Published in London & New York.
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