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Goldman Sachs has pitched hedge funds on strategies to short corporate loans as investors look for new tools to bet against the debt of enterprise software companies and other industries threatened by AI.
The Wall Street bank has offered clients complex trades that would allow them to profit from further falls in loans made to software companies that have come under pressure in recent months, said several people familiar with the matter.
Many of these companies are owned by private equity groups, which spent hundreds of billions of dollars between 2020 and 2024 snapping up makers of enterprise software whose business models are now under threat from advancements in AI.
The strategies, which Goldman bankers have pitched on an informal basis, focus on esoteric products known as total return swaps, derivatives that would allow investors to profit if a loan price declined, the people said.
Goldman has received a number of requests in recent weeks from clients for the swaps, they added. The bank has also begun informally contacting hedge funds that are keen to bet against the prices of loans to technology companies. Investors are looking for ways to wager on trouble in the software industry as new AI models proliferate.
While some hedge funds have used swaps in the past to short loans, many told the FT that they were unable to find a counterparty willing to take the risk of engaging in these trades. A person familiar with the matter said Goldman had not executed any of these trades at this point.
Goldman said: “As a market-maker, we obviously engage constantly with clients on facilitating the trading strategies they want to execute. This happens every day across many asset classes in every market environment.”
“There’s more discussion than I’ve ever seen in my career about broker-dealers trying to assist and partner with hedge funds to short loans,” said one portfolio manager, who has worked on Wall Street for decades.
Goldman is not widely marketing the strategy and has instead offered its services to specific clients, said two of the people. Helping hedge funds bet against corporate loans can be a sensitive business given that other parts of the bank compete to underwrite these types of loans for some of their most important clients: private equity groups.
Funds have few options to short loans at a meaningful scale even though the $1.5tn US leveraged loan market has ballooned over the past decade.
Loans are contracts that provide guaranteed payments on bespoke terms and they can differ significantly between companies. Some loan documents bar specific asset managers from investing, complicating the ability to trade the debt between different funds.
People familiar with the matter said hedge funds had been increasingly interested in shorting loans since Apollo Global Management successfully bet against several large loans to software makers last year, the FT previously reported.
Hedge funds can also bet against loans by shorting exchange traded funds that bundle them. However the biggest ones include exposure to a range of industries not just software, which can hamper investors’ ability to make targeted bets against the debt of individual companies.
Additional reporting by Robert Smith in London
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