Financial sector innovation has helped the alternative industry to grow, but it has been a double-

edged sword. Consider complex structured products such as collateralized debt obligations (CDOs)
and collateralized loan obligations (CLOs), which packaged junk grade fixed income securities into
investment grade instruments. These products helped private equity buyout firms to issue large
amounts of debt in the boom years before the global financial crisis in 2008. However, similar
instruments that packaged mortgage related debt and sold to traditional investors proved
disastrous, as the opaque distribution of risk throughout the financial system made it difficult to
ascertain how much risk was being accumulated and where it was located. Other such examples
include the invention of high yield “junk” bonds in the late 1980s, followed by the crash of the early
junk bond market, and the trading strategies of Long-Term Capital Management, a giant hedge fund
that came close to failure in September 1998 before being rescued by the banking industry.