Investors and fund managers bitten by the collapse in subprime mortgages are now looking for new opportunities to trade bonds linked to traditionally volatile commodity prices and risky emerging markets.

While the ensuing credit crunch from the subprime collapse reduced liquidity and rocked markets globally, there are some who see a comeback in packaging commodities and emerging market securities -- even though they are viewed as some of the riskiest investments in the marketplace.

These are very new markets, said Mirko Mikelic, a fund manager at Fifth Third Asset Management in Grand Rapids, Michigan. I don't think many investors feel yet they are going to be compensated...I think people will look at it, but it's not clear if it's a viable market.

Some managers are already setting up deals, however. But the shape of the business is changing. The era of the small manager has probably come to an end, according to Alex Cigolle, chief investment officer of Strategos Capital Management, the CDO management unit of Philadelphia-based Cohen & Co. You're going to see massive consolidation.

That shrinking market is sparking a new migration on Wall Street. Now, in a search for higher-yielding assets -- and new jobs -- an army of structured credit experts is studying products such as Collateralized Commodity Obligations, or CCOs, that are tied to the performance of a portfolio of underlying commodities, such as precious metals or energy prices.

For more details on CCOs, see

The gravitation toward commodities makes sense as new records in oil, gold and wheat prices helped five of the world's best-known commodity indexes gain an average of 18 percent through September, trouncing stocks and bonds.

Things like debt linked to commodities and emerging market CDOs are still being sold, said Lars Gloessner, a senior consultant for Huxley Associates, a Wall Street job recruiter. Those might potentially be areas where people will shift and where deals might get done.

Businesses are disappearing because there are no deals to manage, Gloessner said. People are talking about CDO-like structures on other products.


Here's how a typical CCO works. The issuer sells protection on the underlying commodity portfolio to the counterparty under what is known as a trigger swap agreement.

To fund its obligations under the swap, the issuer sells notes in the amount of the protection sold, according to Fitch Ratings. Proceeds from the notes then serve as collateral for the issuer's exposure under the swap until it matures.

At maturity the issuer liquidates the remaining asset and returns the proceeds to noteholders.

Like CDOs, the risk of owning CCOs depends on the structure's exposure to declining assets and diversification.

The risk is if there is a trigger event, in which the valuation price of a commodity falls below a predetermined trigger price at a specified time or over a specified period.

In this case, CCOs that reference a low number of highly correlated commodities, such as a portfolio of energy assets, would be perceived as more risky than a CCO referencing a more diverse portfolio of commodities.

Credit Suisse in April completed its first global issuance of $190 million CCO debt rated AAA, denominated in U.S. dollar, euro and Australian dollar.

This product has opened up a new investment opportunity for investors who traditionally have not had exposure in commodities as an asset class, Bikram Chaudhury, a director of Credit Suisse's fixed-income department, said in a statement.

Barclays Capital in December 2004 launched the first rated CCO to create debt-style payoff, allowing investors access to a historically uncorrelated asset class and exposure to a basket of commodities in an established fixed income format.


In a strange twist, the current credit crisis makes even riskier assets in emerging markets seem like a safe haven, some investors said.

Markets such as China and Brazil show promise in terms of economic growth and as investors seek alternatives to assets linked to the United States and more potential housing problems.

People have been very sensible indeed about buying emerging markets during this crisis, said Andrew Milligan, global strategist for the $280 billion fund manager Standard Life Investments, based in Edinburgh. It's a peculiar crisis this time. It hasn't affected the emerging markets.

U.S. dollar-denominated emerging market sovereign bonds have a return on investment of 4.6 percent year-to-date, outpacing the 4.1 percent return for U.S. junk bonds and the 2.7 percent return for high-grade debt, according to the JP Morgan and Merrill Lynch data.

The search for new products comes after a record $477 billion in global issuance of CDOs that saw managing directors being lured to Wall Street banks for $4 million salaries. Rating company analysts making $150,000 a year were being hired for twice that amount, according to job placement firms.

Then many investors discovered some top-rated CDOs were linked to deteriorating U.S. subprime mortgages that began to trigger losses in various portfolios. When banks began to stop lending, the easy access to cash that hid problem investments began to be exposed, sparking more losses that spread to other markets.

People mistook financing for liquidity, said Mike Rosenberg, a managing director at Polygon Investment Partners, during a recent bond conference in New York. When banks pulled back that led to a tremendous ripple effect, throughout the market in a whole bunch of asset classes.

We're certainly in the midst of a major downturn, Cohen & Co.'s Cigolle said at the conference sponsored by the Securities Industry and Financial Markets Association. The smaller managers will definitely have a difficult time surviving.