Alphabet soup; All you want to know about “CPPI” and “CPDO”
Story date: 2006.11.03
Cairn was one of the pioneers of the introduction of CPPI technology into the credit market with a series of public and private deals led by Credit Suisse and HSBC, starting with Cairn CPPI I launched in April 2005.
CPPI, Constant Proportion Portfolio Insurance to use its full name, is a risk management technique pioneered in the 1960s which is designed to leverage investment strategies whilst providing a measure of downside protection. At the most basic level the manager of a CPPI strategy reduces the leverage of the strategy as, when and if the strategy loses money, and conversely increases leverage as, when and if the strategy makes money. The technique works well for strategies which don`t experience major adverse jumps. It has worked well in the credit markets to this point.
The success of CPPI has been followed by the launch in the summer of CPDO products. CPDO (Constant Proportion Debt Obligations) use similar principles to those underlying CPPI, but provide products which benefit from ratings and which do not enjoy principal protection. At its most basic level the CPDO increases in leverage as, when and if it loses money. Clearly that is the opposite risk management technique to that deployed in CPPI strategies. For risk managers one could be characterized as "running your profits" and the other as "doubling up".
Both products can add useful characteristics to investors` portfolios. The recent popularity of CPDO strategies, pioneered in the credit market by ABN Amro, have had a significant impact on the level of credit spreads...driving them tighter.
Courtesy of those nice folk at Fitch we attach a detailed but straightforward primer on CPPI and CPDO click here to read
