"Is it the 'subprime crisis' script again? Goldman Sachs pitches 'short corporate loans strategy' to hedge funds."

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As warning signals continue to flash in the private credit market, Wall Street’s biggest market makers have quietly started taking positions on the other side.

On Tuesday, according to the Financial Times, Goldman Sachs is recommending a short-selling strategy on corporate loans to its hedge fund clients, using a derivative tool called a "total return swap," which allows investors to profit when loan prices fall. According to sources, Goldman has recently received multiple related inquiries from clients and has proactively approached hedge funds interested in shorting technology company loans. So far, the bank has not yet completed any actual transactions.

Behind this move, the private credit market is under mounting pressure: BlackRock has announced restrictions on redemptions from its $26 billion corporate loan fund; Blackstone’s private credit fund has faced a record 7.9% redemption request; and PIMCO has warned that the direct lending industry is heading into a "full-scale default cycle." These signals have sharply heightened market concerns over the quality of corporate loan assets.

This scene reminds some market observers of the eve of the 2008 financial crisis. At that time, Deutsche Bank trader Greg Lippmann’s team marketed as much as $35 billion in credit default swaps (CDS), helping clients short subprime mortgages and ultimately earning Deutsche Bank substantial fees in the crisis—Wall Street’s role as a provider of shorting tools when risks accumulate now seems to be reappearing in the corporate loan market.

AI Boom Triggers Demand for Short Selling

Goldman’s short-selling strategy is targeted at the enterprise software industry. From 2020 to 2024, private equity firms have spent hundreds of billions of dollars acquiring enterprise software companies, whose business models are now under direct threat from advances in AI technology, putting downward pressure on related loan prices.

Sources said Goldman is not marketing this strategy broadly but rather targeting select clients. A portfolio manager with decades of Wall Street experience told the Financial Times: "In my career, I’ve never seen so much discussion about brokers helping hedge funds short loans."

According to earlier Financial Times reports, after Apollo Global Management successfully shorted several large loans of software companies last year, hedge funds’ interest in shorting loans has continued to heat up.

Lack of Tools and Structural Gaps in the Market

Although the size of the U.S. leveraged loan market has swelled to $1.5 trillion, hedge funds’ tools for large-scale short selling remain extremely limited.

Loans are essentially fixed-income contracts with customized terms, showing significant differences between companies; some loan documents even explicitly restrict participation by certain asset managers, further limiting the circulation of loans among different funds. Multiple hedge funds told the Financial Times that they had attempted to short loans via swaps but found it difficult to find institutions willing to take on counterparty risk.

Another alternative is to short exchange-traded funds (ETFs) packaging loans, but major ETFs cover multiple industries and cannot provide precise exposure to the debt of specific software companies.

However, Goldman’s business is not without internal pressure. Helping hedge funds short corporate loans poses a potential conflict of interest with the bank’s loan underwriting business—these loan issuers are precisely Goldman’s most important client base: private equity firms. Goldman responded: "As a market maker, we communicate daily with clients about the trading strategies they want to execute. That occurs across all types of assets and in all market environments."

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