The gap between the best and worst performing CLO funds widened sharply in Q2. Manager credit selection is the edge for the second half. Default risks are climbing.
Alpha Score of 40 reflects weak overall profile with moderate momentum, poor value, moderate quality, moderate sentiment.
Total returns for CLOs diverged in Q2. Spread tightening across the capital stack drove gains in all tranches. The gap between the best and worst performing funds widened, traders said. The dispersion was the quarter's defining feature. The average return was a distraction, traders said.
Lower-rated mezzanine notes led the gains. The move lifted the average CLO return. The dispersion between managers exposed a deeper divide in the market. Some managers posted double-digit returns. Others barely broke even.
The dispersion reflected differences in loan selection and manager skill, not just market beta, the traders said. Funds that loaded up on CCC-rated loans captured the spread tightening early. They now face a rising default rate. Funds that stuck to higher-rated credits lagged in Q2. They carry less rollover risk into the second half. The bifurcation in credit quality is accelerating, the traders said.
For the rest of 2026, the edge shifts from beta to manager selection. The CCC default rate is expected to rise through year-end. That will separate the managers who built in strong credit selection from those who relied on spread beta, the traders said.
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