CLO spreads are historically tight across much of the capital stack, but that means investors have to spend more time working out where value lies across the capital stack and across CLO mangers.
9fin sat down with Jay Huang, head of structured products investments at CIFC Asset Management, to discuss manager differentiation, lessons from the software sell-off, where he sees the best opportunities across the CLO capital stack, and why investors often mistake liquidity-driven volatility for credit risk.
He sees pockets of value in distressed double-B debt and shares his view on why finding the bottom of the market during a sell-off is not as important as putting money to work quickly.
1. When software credits came under pressure, did you see CLO managers seek to reposition portfolios? For managers that reduced software exposure, where did they rotate capital, and did those moves represent prudent adaptation, or style drift?
What stood out to me was how differently managers reacted. Some reduced software exposure, some rotated into other software credits, and others held their positions or added opportunistically where they had room. Managers that already had large software allocations generally had less room to add, while those with more flexibility could take advantage of the dislocation. The sell-off was largely a sector-wide event at first, and in several cases the managers that leaned into that weakness rather than stepping away have been proven right so far.
2. Investor focus on manager differentiation seems higher than ever. What characteristics separate the managers you most want exposure to today, and has the gap between top-tier and lower-tier managers widened over the past few years?
People like to talk about top-tier managers, but those groups aren't as fixed as many investors think. Even if you take the 20 managers that are generally considered to be among the best in the market, a few of them will disappoint you in some way over time. There are certainly managers that deserve to trade at a premium and manager differentiation still exists today, but performance leadership changes. The managers at the top of the rankings today won't necessarily be the same managers at the top five years from now.
3. Where are you finding better opportunities today — in primary or secondary markets — and what is driving that preference?
If you're looking for the most compelling relative value, it's probably in older distressed CLO debt. There are original B-rated tranches trading around 70 cents on the dollar with only a few years left until maturity, which can offer a level of yield and downside protection that's hard to find elsewhere.
For cleaner CLO debt, though, there's still a lot to like in the primary market. You have more control over where your capital goes, and the rise of captive equity funds has changed the dynamics of new issuance. Equity has become more competitive and returns have come down, but weaker arbitrage can actually create better opportunities for debt investors.
4. Looking across the CLO capital stack, where do you see the best relative value today, and which areas look fully priced?
Equity feels fully priced at this point. As more capital has come into the market, returns have come down and it's harder to find the same opportunities that existed a few years ago. The best relative value remains in distressed mezzanine CLO debt, including originally double-B-rated tranches trading roughly 30 to 70 cents on the dollar.
One area that stands out more today is cleaner double-B-rated CLO debt. That part of the market has lagged, largely because investors are still trying to understand what changes to NAIC capital rules could mean. The uncertainty has weighed on valuations and created opportunities in clean double-B tranches that look attractive relative to the rest of the market.
5. How would you describe the fundraising environment for structured credit strategies today? Are investors still adding exposure, or are allocations becoming more selective as spreads tighten?
Fundraising has been met with a very positive reception. For a long time, CLOs had to overcome the perception that they were somehow linked to the mortgage products that caused problems during the financial crisis, even though the two markets are very different. That misunderstanding has faded over time as investors have become more comfortable with the asset class and its track record. More recently, the growth of CLO ETFs has helped introduce the market to a broader set of investors and further improve perceptions of the asset class.
6. How has CLO liquidity evolved from your time on the sell side through to today?
Night and day. There is no comparison. When I was last on the sell side 10 years ago, CLOs were still wearing a scarlet letter that belonged to someone else entirely. Most people confused them with mortgage CDOs, which they never were. CLOs had nothing to do with mortgages. In fact, CLO debt tranches barely took any losses throughout the crisis and arguably was one of the most robust credit asset classes of that era. But that story never made the press.
What's changed? I think, everything. The buyer base is deeper and more diversified. You've got bellwether asset managers, pension funds, insurance companies, sovereign wealth funds: patient capital that actually improves liquidity rather than amplifying volatility.
Over the past couple years, ETFs have taken liquidity to another level — not just opening a retail path, but adding a whole new liquidity mechanism for existing holders through the create/redeem process. And the SEC's approval of CLO ETFs was a watershed moment for social acceptability. It gave investors and LPs the institutional imprimatur they needed — a hard fact to bring to their IC committees when making the case for the asset class.
And data. 10 years ago you were flying blind. Getting basic data meant putting a team on it. Today it's everywhere. Back then, there was no reliable way to track long-term total return performance of CLOs. CLOIE and other indices changed that. New pricing and modeling services emerged. And now that the asset class has an established long-term track record, that performance data is finally getting out there — and when people actually look at the crisis track record, the stigma evaporates.
And I think the data will keep pulling new investors in. When retail buyers start to realize that triple-A CLO ETFs offer higher yields than treasury ETFs (with a fraction of the volatility) that's going to turn a lot of heads.
7. What's one misconception investors still have about CLOs that you think deserves to be challenged?
One of the biggest misconceptions about CLOs is that price volatility is the same thing as credit risk. Many investors assume that because CLOs can be more volatile than corporate bonds, they must be fundamentally riskier. In reality, the historical default experience tells a very different story, with CLO default rates representing only a fraction of those seen in corporate credit markets. Much of the volatility investors witnessed during periods such as 2020 and 2022 was driven by liquidity conditions rather than credit deterioration.
The CLO investor base is still relatively concentrated, and when buyers temporarily step away from the market, prices can move sharply even when the underlying credit fundamentals remain intact.
8. What is the most interesting debate or emerging trend in structured credit that you think deserves more attention from investors right now?
The biggest trend is the continued broadening of the investor base. Every year, more traditional asset managers, insurance companies and smaller investment firms are allocating to CLOs. As that investor base becomes deeper, the market starts to look more like other established areas of credit.
40 years ago, dedicated distressed debt investors barely existed, whereas today they're an important part of the market. CLOs could follow a similar path, with increasingly specialised investors and potentially dedicated distressed CLO strategies emerging over time.
9. What's the best investing lesson you've learned during your career that still influences how you allocate capital today?
The most valuable lesson I've learned — and one that requires constant self-discipline — is that during a market dislocation, allocating capital evenly throughout the sell-off to capture a good average price is far more important (and achievable) than trying to time the bottom.
When volatility hits, the natural human instinct is to freeze, hold onto cash, and wait for the exact turning point. But trying to time that pivot is a psychological trap. You spend every day worrying that the market will drop another 5%, and you end up missing the window entirely. Every time we study the data across past market cycles, the numbers reinforce the same reality: you don't need a perfect entry point to win. Investors who simply build a disciplined process to average into those drawdowns achieved tremendous long-term returns, sometimes only marginally worse than if they had begun their deployment at the bottom.
In fact, we have to remind ourselves that if we are doing it right, we should expect to see some of our early tranches temporarily marked down as the dislocation plays out. Accepting that short-term noise is just part of the process of pacing your capital evenly. It's a powerful reminder that being underinvested when the rebound happens is vastly more expensive than the discomfort of beginning your deployment a little early.
