“We felt that CLO valuations were close to their peak so decided to assemble a fund that could capitalise on any dislocation,” says Janne Gustafsson, senior portfolio manager at Helsinki-based Ilmarinen.

It can take up to a year for institutional investors to decide where to allocate and to negotiate with third-party managers. This means they often miss out on opportunities.

Ilmarinen’s tactic, which took six months to finalise, requires the fund manager to have the patience to hold off from drawing down capital for long periods.

“We structured it as a draw-down fund with a five-year investment horizon,” says Gustafsson. “To ensure the fund manager was incentivised to draw down the capital from us at an appropriate time, we agreed a low running management fee with a high incentive fee.” Such an arrangement can backfire if no distressed wave materialises, but the five-year window was created to give the fund manager (whose identity has not been disclosed) the ability to wait for an opportunity.

Gustafsson says that the fund structure delivered its desired results, with the manager drawing down all available capital in the past month or so. During this time, CLO triple B tranches have dropped about 20 points to the low 70s, with double B tranches trading at least 10 points back.