Hedge funds and other investors are increasing bearish bets against private credit as a prolonged selloff in global bonds raises fresh questions about the resilience of the $1.8tn market, according to a report by Bloomberg.
Although private credit assets are not easily shorted directly, traders can take positions against listed vehicles and other proxies, including business development companies (BDCs), collateralised loan obligations and alternative asset managers with significant exposure to the sector.
Data from market intelligence firm EPFR shows that net short selling across a 14-ETF sample tracked using FINRA data reached $88.6m during the first half of September. That was roughly double August’s $44m and close to the $102m recorded in March, when investors were exiting private credit positions more aggressively.
The number of shares sold short also climbed sharply, reaching 6.4 million by mid-September from 2.9 million at the end of August. March saw around seven million shares sold short.
Short interest as a proportion of assets under management across the ETF sample stood at 2.8% at the end of last year before reaching a record 3.4% in March. It subsequently eased to 2.1% in August as traders reduced bearish positions, but had recovered to 2.7% by mid-September.
The growing appetite for downside exposure is being supported by major banks, with Goldman Sachs, JPMorgan and Bank of America among those offering clients ways to take bullish or bearish positions on private credit through baskets of publicly traded companies.
Those baskets include alternative asset managers, BDCs and financial institutions with private credit operations. The banks have not disclosed the level of trading activity in the products.
