![]() This complexity can make it difficult for investors to fully understand the risks involved and make informed investment decisions. Complexity: CLOs can be complex investment vehicles, with multiple tranches, different levels of credit risk, and varying payment structures.This can negatively impact the returns of CLO investors, particularly if they were counting on a certain level of interest income over a longer period. Prepayment Risk: The underlying loans in CLOs can be prepaid, which means the borrower pays off the loan earlier than expected.If interest rates rise, the value of these securities may decline. Higher Interest Rate Risk: CLOs are typically structured as fixed-income securities with a set interest rate.During times of market stress, it may be difficult to find a buyer for CLO securities, which could make it challenging for investors to sell their holdings or exit their positions. Residual Liquidity Risk: Although CLO securities are generally more liquid than the underlying loans, they are still subject to liquidity risk.A sudden increase in loan defaults could cause significant losses for investors. These loans are typically made to non-investment grade borrowers, which means they are more likely to default. Higher Credit Risk: CLOs are exposed to credit risk associated with the underlying loans.Professionally Management: The collateral manager is responsible for managing the loan pool that backs the CLO securities, which can provide investors with access to professional management and expertise in the credit markets. ![]() This can make it easier for investors to manage their portfolios and exit their positions when needed.
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