XL Capital Assurance on the importance of diversification to the performance of CDOs

Although CDOs are now 14 or so years old, structural innovation continues unabated and more innovation usually translates into more involvement by the monoline insurers. While it is important to have a strong structure, perhaps nothing helps a CDO transaction, or a portfolio of CDO investments, more than diversification. The best of managers cannot consistently beat the market or avoid defaults. Many CDO investors know that concentrations are little more than expensive wagers. If there is one lesson to be learnt from the performance of CDOs of various cohorts and types, it is this: Diversify.

This lesson has not been lost on the monolines.

~ Iftikhar Hyder, XL Capital Assurance Inc., "Collateralised Debt Obligations and the Role of Monoline Insurers," September 24, 2002