Wall Street Investment Banks Step Up Hedging Against Private Credit Risk, Begin Trading Crisis Bets

[The Financial News]  \r\n
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Major Wall Street investment banks are moving to diversify private credit risk and hedge it as a source of profit.
The Financial Times (FT) reported on the 17th local time that major Wall Street banks, including JPMorgan Chase & Co. and Barclays PLC, have begun trading products that could generate profits if private credit, or private debt, funds run into trouble. The move marks a more active push to hedge against market turmoil in private credit while also limiting losses and potentially making gains.
According to sources, the banks recently began CDS trades linked to flagship private credit funds managed by Blackstone Inc., Apollo Global Management, and Ares Management.
These products pay out insurance-like compensation if the funds' private debt fails to be repaid and turns sour.
Sources said JPMorgan Chase & Co., Barclays PLC, Morgan Stanley, and Citigroup Inc. have introduced CDS on the three funds. Trading volume, however, remains relatively small.
Investors can also use these CDS to profit from market anxiety. Even if they do not believe an actual default will occur, they can make money by buying CDS if they expect sentiment across the private debt market to deteriorate. As fears of rising risk grow, the price of the derivative rises.
CDS are now entering the market as the massive $2 trillion private credit market struggles amid concerns over borrowers' ability to repay.
Private credit distress is also linked to Artificial Intelligence (AI).
Trouble has emerged in private credit as software companies that borrowed from private equity funds struggle amid concerns that AI could take over their markets.
Concerns have intensified that software companies' enterprise markets could be overtaken by AI after Anthropic PBC and others launched AI agent products much earlier than expected this year. With AI agents, companies can develop their own customized software with little effort. The prospect of not needing to pay high subscription fees for specialized software vendors has shaken the software industry.
As worries grow that the private credit industry, which has lent heavily to the software sector, could come under strain, CDS from major banks have entered the market.
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dympna@fnnews.com Song Kyung-jae Reporter