Senior Loan Funds as a Money Market Alternative

Abstract

Senior or bank-loan funds are becoming an increasingly popular alternative to money-market funds despite their increased risk. Senior loans are generally variable interest rate loans made to corporations with average to poor credit ratings. The attraction for investors is that senior loans should not lose their value as interest rates rise and, in fact, should generate higher yields as rates increase. In addition, senior loans usually hold collateral against the borrower's assets, and thus the cost of default is lower than with typical high-yield bonds. We explore the characteristics of these funds to determine: 1) whether they do in fact move in tandem with interest rates, and 2) what role they should play as a money-market alternative.

TOPICS: Mutual funds/passive investing/indexing, portfolio construction, risk management