Funds driven to derivatives

In an environment where many fund managers have been struggling to post decent returns, the potential rewards of the credit derivatives market are an understandable temptation. But such instruments may not always be suitable, as Alan McNee reports

Fund managers in Europe face big problems. Years of weak equity markets, low volatility during 2004 and a dearth of new issuance have combined to make it tough for pension and other fund managers to make healthy returns. So could credit derivatives be the answer?

Although a growing number of European fund managers have started to use credit default swaps (CDS), tradable credit indices and collateralised debt obligations (CDOs), many are still cautious. But the prize for those who