What is a Total Return Swap?
Total return swaps are a strategy in which each party receives some type of rate or return on a particular reference asset. Hedge funds are one of the more common types of financial investments that make use of this type of arrangement. The swap is usually classified as one form of a credit derivative, although the process is not an exact match for the usual working definition for this type of derivative. In a total return swap strategy, one of the participating parties will receive interest payments on the hedge fund. Included with the interest payments are capital gains and losses for the period cited. The other party in the transaction will receive some sort of fixed or floating rate as compensation for participation. Usually, the floating rates are based on the current LIBOR. A spread that is predetermined between the parties at the time the deal is established helps to keep the balance between the partners within reasonable perimeters. While a total return swap is sometimes unders
