TY - JOUR T1 - Investor Perspective on Hedge-Fund-Linked Principal-Protected Securities JF - The Journal of Alternative Investments SP - 32 LP - 43 DO - 10.3905/jai.2004.419602 VL - 7 IS - 1 AU - Shanker Merchant Y1 - 2004/06/30 UR - https://pm-research.com/content/7/1/32.abstract N2 - Principal-protected securities are the most popular form of structured hedge fund products, and constitute the largest segment of the structured hedge fund market. Financial institutions provide guarantees for the repayment of the principal amount of the protected securities at maturity. To date, structured hedge fund practitioners have used, by and large, the constant proportion portfolio insurance (CPPI) methodology to structure these securities, although some have used the Black-Scholes option (Option) pricing methodology as well. However, few, if any, of the practitioners have used the collateralized debt obligation (CDO) methodology in structuring these securities. The CDO methodology has been one of the most successful and popular methodologies in the structured fixed-income securities market. The CDO methodology obviates the need for a financial institution to guarantee the principal of the securities. This article is designed to illustrate the basic structural frameworks, investment processes, and benefits of the CDO, CPPI, and Option methodologies. The preference for a methodology in structuring a protected securities transaction depends on several factors, such as target investor, leverage, and cost. The author believes that as the market grows and becomes more competitive, the CDO methodology will become one of the structural alternatives for the principal-protected securities transactions. ER -