A previous version of this working paper was originally published in December 2020.

We study the performance of collateralized loan obligations (CLOs) to understand the market imperfections giving rise to these vehicles and the corresponding costs. CLO equity tranches earn positive abnormal returns from the risk-adjusted price differential between leveraged loans and CLO debt tranches, rather than managerial skill in selecting and trading loans. Debt tranches offer higher returns than similarly rated corporate bonds, making them attractive to regulated intermediaries demanding safe assets. Temporal variation in equity performance and management fees highlights the resilience of CLOs to market volatility due to their long-term funding structure and a reduction in surplus over time as the market has grown.