Siegel and Overdeck, co-chairmen of the $52 billion hedge fund Two Sigma, are using a collateralized fund obligation at Sightway Capital, which invests part of their fortune. The CFO raised $216 million through a securitized note sale last month, according to the company. The notes will be repaid by the cash flows from stakes in 32 private equity funds.

The CFO adds leverage to Sightway’s private equity fund holdings, increasing the volatility while freeing up cash for other investments. Hedgefunds and private equity firms have been increasingly using a similar technique to finance loans to leveraged corporations, packaging the debt into collateralized loan obligations.

“It’s the same thing that leverage has done since Egyptian times,” saidFranklin Rudd, a partner at Compass Partners International, a private equity investor. “It takes an asset that people assume is low risk because it’s diversified and allows you to borrow against it. But when markets turnaround, everything goes down.” […]