A bespoke collateralized debt obligation (CDO) is a structured financial product that a dealer creates for a specific group of investors. The bespoke CDO is structured according to the investors' needs. The investor group then typically buys a single tranche of the bespoke CDO. The remaining tranches are then held by the dealer, who will usually attempt to hedge against losses. A bespoke CDO is also referred to as a bespoke tranche or a bespoke tranche opportunity.



Bespoke CDOs can be traditional CDOs pooling classes of debt with income streams, but the term is usually referring to synthetic CDOs that invest in credit default swaps (CDS). A bespoke CDO is simply a tool that allows investors to target very specific risk/return profiles for their investment strategies or hedging requirements. If an investor wants to make a large, targeted bet against the goat cheese industry, there will be a dealer who can build up a bespoke CDO to do that for the right price.

Bespoke CDO or Bespoke Tranche Opportunity?

Bespoke CDOs and CDOs in general have faded from public view due to their prominent role in the financial crisis that followed the mortgage meltdown from 2007-09. The fact that Wall Street was creating these complex, highly structured investments that were hard to understand and difficult to value was seen as part of the overall lack of common sense that led to the massive market crash and eventual government bailout.

Despite this, CDOs are a useful tool for moving risk to willing parties and freeing up capital for other uses. Wall Street is always looking for ways to move around risk and unlock capital, so the bespoke CDO became the bespoke tranche opportunity. This rebranding hasn't changed the tool itself, but there is presumably a bit more scrutiny going into the pricing models so that the owners don’t find themselves once again holding obligations they don’t properly understand.  

Pros and Cons of Bespoke CDOs

The obvious advantage of a bespoke CDO is that the buyer can customize it according to his market thesis. The disadvantage is that there is typically there is little to no secondary market for bespoke CDOs, so pricing must be calculated based on complex theoretical financial models. Those models can make assumptions that turn out to be catastrophically wrong, costing the holder dearly and leaving them with a financial instrument they are unable to sell at any price.

  1. Warehousing

    Warehousing is an intermediate step in a collateralized debt ...
  2. Active Tranche

    An active tranche is the portion of a collateralized mortgage ...
  3. Planned Amortization Class (PAC) ...

    A planned amortization class (PAC) tranche is a type of asset-backed ...
  4. Financial Crisis

    A financial crisis is a situation where the value of assets drop ...
  5. Structured Finance

    Structured finance is a highly involved financial instrument ...
  6. Weighted Average Rating Factor ...

    The weighted average rating factor (WARF) is a measure that is ...
Related Articles
  1. Investing

    Down The Rabbit Hole: Deciphering CDOs

    Warren Buffett claims that understanding these instruments would mean reading 750,000 pages of text. Read on to learn the basics.
  2. Personal Finance

    Bespoke Post Review: Is It Worth It?

    Find out if Bespoke Post, the fast-growing, e-commerce subscription service for men's lifestyle and grooming products, is worth all of the hype in this review.
  3. Investing

    The Return of CDOs After the 2008 Financial Crisis

    Learn how the market for CDOs is coming back after the 2008 financial crisis, and understand how the market for these products has changed.
  4. Investing

    CMO vs CDO: Same Outside, Different Inside

    The concept of collateralizing and structured financing predates the market for collateralized mortgage obligations and collateralized debt obligations.
  5. Investing

    Why Stocks Will Finish 2017 On a Bull Run

    The S&P 500 may gain another 5% or more through the end of 2017, if history repeats itself.
  6. Investing

    Stock Sell-offs on Robust Profits Is a Red Flag

    Investors are bidding up U.S. stocks before robust profit reports, but quickly sell afterwards.
  7. Investing

    Wall Street's Exuberance May Signal Coming Bear Market

    Untamed Bull: analysts' extreme bullishness on corporate profits often precedes a big market drop
  8. Investing

    Stocks Face Miserable August as Correction Looms

    August has often been a rough month for stocks.
  9. Insights

    The Fuel That Fed The Subprime Meltdown

    Take a look at the factors that caused this market to flare up and burn out.
  10. Investing

    Earnings Beat Too-Low Expectations, Like They Always Do

    Stacked deck: Q3 earnings are coming in above expectations, likely because forecasts are, once again, too low. So why do analysts lowball estimates?
  1. The Differences Between a Collateralized Debt Obligation (CDO) and an Asset Backed ...

    Learn about the differences in relationships between asset-backed securities (ABS) and collateralized debt obligations (CDOs) Read Answer >>
  2. Were Collateralized Debt Obligations (CDO) Responsible for the 2008 Financial Crisis?

    Collateralized debt obligations are exotic financial instruments that can be difficult to understand, Learn the role they ... Read Answer >>
  3. Who Bears the Risk of Bad Debts in Securitization?

    Bad debts arise when borrowers default on loans. But that risk can be split up in different ways. Read Answer >>
  4. What is a tranche?

    A tranche is a security, like a collateralized mortgage obligation, that can be split up into smaller pieces and subsequently ... Read Answer >>
Trading Center