Is this another "subprime crisis" script? Goldman Sachs is marketing a "short corporate loan strategy" to hedge funds.

As signals of stress in the private credit market continue to emerge, Wall Street’s largest market makers have begun quietly positioning on the other side.

On Tuesday, the Financial Times reported that Goldman Sachs is pitching a trading strategy to hedge fund clients to short corporate loans, using a derivative called a “total return swap,” which allows investors to profit when loan prices decline. Sources familiar with the matter said Goldman has recently received inquiries from multiple clients and has proactively contacted hedge funds interested in shorting tech company loans. The bank has not yet completed any actual trades.

Against this backdrop, the private credit market is under multiple pressures: BlackRock announced restrictions on redemptions from its $26 billion corporate loan fund; Blackstone’s private credit fund faced a record 7.9% redemption request; PIMCO warned that the direct lending industry could face a “full default cycle.” These signals have sharply heightened concerns about the asset quality of corporate loans.

Some market observers have drawn parallels to the pre-2008 financial crisis. At that time, Deutsche Bank trader Greg Lippmann’s team marketed up to $35 billion in credit default swaps (CDS) to help clients short subprime mortgages, ultimately earning substantial fees during the crisis — a role Wall Street played as a provider of shorting tools amid risk buildup, now seemingly replayed in the corporate loan market.

AI Disruption Sparks Short Selling Demand

The shorting strategy Goldman is promoting targets the enterprise software sector. Between 2020 and 2024, private equity firms spent hundreds of billions of dollars acquiring software companies, whose business models are now directly threatened by advances in AI technology, putting downward pressure on related loan prices.

Sources say Goldman is not engaging in broad public marketing but is instead targeting specific clients. A portfolio manager with decades of Wall Street experience told the Financial Times, “I’ve never seen so much discussion about brokers assisting hedge funds in shorting loans.”

Previously, the FT reported that after Apollo Global Management successfully shorted several large software company loans last year, hedge fund interest in shorting loans has continued to grow.

Limited Tools, Structural Market Gaps

Despite the U.S. leveraged loan market expanding to $1.5 trillion, tools for hedge funds to short extensively remain extremely limited.

Loans are essentially customized contracts offering fixed returns, with significant differences between companies. Some loan documents explicitly restrict certain asset managers from participating, further constraining the flow of loans between funds. Several hedge funds told the FT that they had previously attempted to short loans via swaps but struggled to find counterparties willing to assume the risk.

Another alternative is shorting packaged loans through exchange-traded funds (ETFs), but most ETFs cover multiple industries, making it impossible to target specific software company debt precisely.

However, Goldman’s activity within the bank is not without internal pressure. Assisting hedge funds in shorting corporate loans creates potential conflicts of interest with the bank’s underwriting of similar loans — which are often issued to Goldman’s most important clients: private equity firms. Goldman responded, “As a market maker, we communicate daily with clients about their desired trading strategies, which occurs across various asset classes and market environments every day.”

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