Wall Street banks have started offering investors to bet on problems in private credit

Leading Wall Street investment banks have begun offering clients derivatives to hedge against risks or play down the private credit sector. The emergence of these instruments points to growing investor concern about the sustainability of an industry that has long remained opaque to outside players.

In recent days, JPMorgan Chase, Barclays, Morgan Stanley and Citigroup have launched credit default swaps (CDS) trading against flagship funds managed by Blackstone, Apollo Global and Ares Management. According to Financial Times sources, these contracts allow even giants such as Blackstone Private Credit Fund, with a $83 billion portfolio, to hedge risk or bet on default.

According to traders, since the beginning of trades this week default insurance of all three funds has fallen in price, and JPMorgan expects its value to fall further. The newspaper's interlocutors emphasize that so far the activity of deals with CDS remains moderate.

In parallel, large investors have started to open short positions directly on investment-grade bonds issued by private credit companies, the FT found out. Some players are using the new CDS for arbitrage - capitalizing on situations where the current price of the funds' debt (bonds) is out of sync with the cost of insurance against their default (swaps). At the same time, other market participants are looking at buying cheaper debt securities, considering them oversold amid general skepticism about the private credit industry, the article said.

The reason for creating default swaps on specific funds was the launch of S&P Global's CDX Financials index. It included Apollo, Blackstone and Ares structures alongside traditional banks and insurance companies. According to the FT's sources, Wall Street banks began offering contracts on these funds within "days" of the benchmark's release.

S&P confirms that traders' interest in risk management in private credit has increased markedly in recent months. "The increase in activity in CDS is a response to risk concerns, and it was this feedback from the market that led to the creation of the index," explains Nicholas Godek of S&P Global. The emergence of default swaps against private credit market leaders was a response to investors looking for new strategies to value funds, including non-public ones, the FT notes.

There is no single definition for private credit. It is an umbrella term that combines several debt investment strategies. Lending is considered "private" because, unlike exchange-traded debt instruments, where the organizers of transactions are traditionally banks, the details of transactions here are usually inaccessible to outside observers, Bloomberg points out.

Monica DiChenso of JPMorgan Private Bank believes the risks in the private credit sector are exaggerated. Institutional investors, she said, see fears as a chance to build positions. "They're using that fear as a buying opportunity," she said on CNBC on April 15, calling the panic excessive. DiChenso emphasized that the default rate is holding around 2.5%, matching the historical norm. "If you work with an experienced manager, everything will be fine," the expert assured.

Christine Olson, head of alternative investments at Goldman Sachs, expects the private credit industry to continue to attract capital despite recent fund problems. She advises wealthy clients to allocate up to a quarter of their portfolio to alternative investments. "If you're willing to put up with illiquidity, you can get real alpha [earn more than comparable public assets. - Oninvest] from that non-public markets portion of the portfolio," Olson told Bloomberg on April 16.

Skepticism about the private credit market emerged in 2025 after the high-profile bankruptcies of two auto component manufacturers - the defaults of First Brands and Tricolor raised doubts about the quality of borrower due diligence. An additional cause for concern was the high focus of funds on lending to the IT sector: the business models of software developers risk being seriously affected by the rapid introduction of artificial intelligence.

A wave of concern in the private credit market rose in November when lender Blue Owl canceled the merger of two of its funds because of the risk of losses. This triggered a surge in withdrawal requests, and by early 2026, Blue Owl had to sell $1.4 billion in assets to repay clients. Other industry giants, including Apollo, BlackRock, Ares, Blackstone and Oaktree, faced a similar flood of capital repayment requests: some managed to find the necessary liquidity, while others had to limit withdrawals, Bloomberg wrote.

Two-day increase in quotes of Blue Owl Capital on April 14-15 was the strongest since November 2022: securities rose 17% (to $ 9.92), recovering the fall to a historic low last week, indicates Bloomberg. Investor sentiment has changed due to the rally in financial markets and calming statements of the heads of major U.S. banks: in comments to the quarterly reports, they assured that their risks in the private credit sector "remain manageable". This position was also supported by the United States Treasury Secretary Scott Bessent, who did not identify "systemic problems" in the industry, the agency notes.

This article was AI-translated and verified by a human editor