JPMorgan and Goldman Sachs Unveil New Tools for Hedge Funds to Bet Against Private Credit

Hedge funds are gaining fresh ways to bet against the booming private credit market, thanks to new derivative trades offered by Wall Street giants JPMorgan and Goldman Sachs. The move comes as AI-related fears ripple through corporate loans, especially in the software sector.

Private Credit Under the Spotlight

Private credit has been expanding fast, fueled by big banks and asset managers eager for higher yields outside the public bond market. JPMorgan recently committed $50 billion to private credit, while Bank of America set aside $25 billion. Citigroup teamed up with Apollo for a $25 billion direct lending partnership. The surge in private lending comes with rising concerns, though. The market's risk profile looks shaky as AI-driven disruption fuels anxiety over the ability of some borrowers—particularly in software—to service their debts.

Goldman Sachs is now offering hedge funds a way to speculate on these risks without owning the loans outright. Their new total return swap lets investors take long or short positions on corporate loans, focusing on price swings rather than loan ownership. No deals have been completed yet, but the option marks a new chapter for trading in private credit, a market traditionally hard to short due to bespoke loan contracts and trading restrictions.

AI’s Growing Shadow on Credit Markets

Concerns about AI's impact have spread beyond tech stocks into credit markets, especially loans tied to software firms. Morgan Stanley estimates software loans make up about 16% of the $1.5 trillion U.S. Loan market, with roughly half rated B- or lower. That rating signals higher default risks. While defaults aren’t expected to spike immediately, analysts warn of greater price volatility ahead.

Goldman’s credit team has been bracing for this wave. In a recent investor letter, they noted their exposure to enterprise software loans stands at 15.5%—lower than many rivals—but cautioned against underestimating AI disruption risk. Meanwhile, issuance of leveraged loans in software has stalled, with borrowers waiting for existing debt prices to rebound before issuing new loans.

Hedge Funds Take Aim at Financial Stocks

Goldman Sachs highlights that hedge funds have been aggressively shorting financial stocks this year. Banks, insurers, and fintech companies have been the most sold sectors globally. The S&P financials index has dropped over 11% this year, with European banks down about 8%.

Market watchers link this selling pressure partly to worries about the Middle East conflict's global economic impact and the close connection between financial firms and private credit lenders.

Moody’s recent report revealed U.S. Banks had lent nearly $300 billion to private credit providers by mid-2025. JPMorgan’s recent move to reduce the value of some loans to private credit funds after reviewing market turmoil in software companies sent ripples through the market. When a major player like JPMorgan marks loans lower, it sparks fears others might follow, intensifying selling and short bets.

Bruno Schneller of Erlen Capital Management says short positions in financial stocks may be less about banks’ fundamentals and more about hedging against broader credit risks. The strategy could also help investors brace for a potential recession, he adds. Capital markets firms, financial services, and consumer finance segments have seen the most net selling this year, according to Goldman.

Wall Street’s Expanding Role in Private Credit

Wall Street’s growing footprint in private credit shows no signs of slowing. The rush to allocate capital here reflects a hunt for yield in a low-interest environment. But the tradeoff is higher risk and less transparency than public debt markets. AI-driven disruption adds a new layer of uncertainty, especially for sectors like software that rely heavily on innovation but face competitive and technological threats.

Goldman and JPMorgan’s moves to provide tools for hedging or betting against these risks highlight the financial industry’s adaptation to this evolving landscape. While shorting loans directly remains cumbersome, derivatives like total return swaps could open the door for more active trading strategies in private credit. It also signals Wall Street’s recognition that the private credit boom carries vulnerabilities that need to be managed—or exploited.

Still, the market is watching closely. The next few quarters will reveal how much these AI-driven jitters affect credit quality and lending activity. Borrowers in software and related industries are already cautious, postponing new loan deals while prices stabilize. Investors wonder if price swings will turn into a broader credit crisis or remain contained to a few vulnerable sectors.

Goldman Sachs and JPMorgan’s new strategies offer hedge funds a fresh angle to play both sides of private credit risks. But whether these tools will reshape the market or just add volatility we'll have to wait and see.