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JPMorgan Chase, Barclays and other Wall Street banks have started trading products that would benefit if private credit funds run into trouble, as asset managers seek ways to bet on turmoil in the industry.
The banks began trading so-called credit default swaps against flagship private credit funds run by Blackstone, Apollo Global and Ares Management in recent days, according to people briefed on the matter.
CDS pay out in the event that these vehicles default on their debt, and can be used to bet on or hedge against strains in the industry. The new tools come amid growing demand from investors for novel strategies to express a view on the vehicles, including on funds that are not publicly traded.
Banks including JPMorgan, Barclays, Morgan Stanley and Citigroup were offering to trade the contracts on the three funds, the people added, noting that activity had so far been relatively modest.
Investors may also buy CDS to wager on sentiment souring on private credit generally, even if they do not believe a default will occur, because the derivatives rise in price as the perceived risk of the funds increases.
The advent of CDS contracts on the three funds comes at a sensitive moment for the $2tn private credit industry, which has been struck by a wave of redemption requests from investors.
The funds have also seen their own financing costs rise as banks tighten funding terms, while regulators have been increasingly focused on the ways lenders are intertwined with private credit funds.
The new CDS contracts have begun trading after S&P Global earlier this week launched an index called CDX Financials, which includes vehicles run by Apollo, Blackstone and Ares, as well as banks, insurers, real estate companies and other financial groups.
In the days after the launch of the S&P index, banks began to actively trade CDS on the underlying funds. Those contracts give traders the ability to wager whether the individual vehicles, including the industry’s largest — the Blackstone Private Credit Fund with $83bn of investments — will default on their borrowings.
Traders are not only using the new CDS contracts to bet on the decline of private credit. Many will wager on the difference in pricing between the fund’s bonds and CDS spreads, hoping to profit as they widen or narrow.
Since launching this week, CDS prices have tightened on all three funds, traders said. JPMorgan strategists on Thursday said they expected the spread on Bcred’s CDS would compress further.
Investors have also been placing short bets directly on the investment-grade bonds issued by private credit business development companies, according to people familiar with the matter. Some credit investors are now eyeing purchasing the debt, betting that the bonds are oversold.
The banks declined to comment.
The new products come as banks across Wall Street have for months been attempting to devise strategies that would let their clients bet on further pain in private credit. Some investors are wagering the industry, which has lent heavily to private equity-backed software companies, will suffer an uptick in defaults as advances in AI disrupt their businesses.
While Goldman Sachs and JPMorgan have explored ways to use total return swaps, another kind of derivative, to wager against loans to software businesses, they do not appear to have meaningfully executed those transactions, people briefed on the matter said.
Others, such as Bank of America, had pitched their clients trades betting against stocks that its sales team believed were “most exposed to private credit shocks”. BofA ultimately withdrew the recommendation.
S&P said that it had received more interest in recent months from traders and investors to manage their exposure to private credit.
“To the extent that there’s perceived concerns around risk, you see CDS activity pick up,” said Nicholas Godec, head of fixed-income tradables and commodities at S&P. “It’s a similar feedback loop from the market that led to this index, too.”