Hedge funds and other investors have been increasing bearish bets against private credit as a prolonged selloff in global bonds raises questions about the resilience of the $1.8tn private credit market, according to Private Equity Wire. Traders have been using listed vehicles and other proxies to express negative views because private credit assets are not easily shorted directly, according to Private Equity Wire.
Shorts rise across a tracked ETF sample
Data from market intelligence firm EPFR shows net short selling across a 14-ETF sample tracked using FINRA data reached $88.6m during the first half of September, according to Private Equity Wire. EPFR data shows that $88.6m figure was roughly double August’s $44m and close to the $102m recorded in March, when investors were exiting private credit positions more aggressively, according to the publication.
The number of shares sold short across the ETF sample climbed to 6.4 million by mid-September from 2.9 million at the end of August, according to Private Equity Wire. March saw around seven million shares sold short, according to the same report.
Short interest as a share of AUM moves back up
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, according to Private Equity Wire. The short-interest proportion then eased to 2.1% in August as traders reduced bearish positions, but recovered to 2.7% by mid-September, according to the publication.
How investors are expressing private credit shorts
The report said traders can take positions against listed vehicles and other proxies tied to private credit, including business development companies (BDCs), collateralised loan obligations, and alternative asset managers with significant exposure to the sector, according to Private Equity Wire.
The publication also reported that 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, according to Private Equity Wire. The banks have not disclosed the level of trading activity in the products, according to the publication.
Context
Private credit is often characterised as lending performed by non-bank lenders, and positions in private credit typically do not trade on public exchanges as frequently as listed equities or bonds. The report described investors using exchange-traded funds and other listed proxies as a way to express bullish or bearish views on the sector when direct shorting is difficult, according to Private Equity Wire.
