Fears over U.S. private credit distress drive surge in short selling of financial stocks

S&P Financials sector index down 11%

Fears of distress in the U.S. private credit market are fueling fund runs and a spike in short selling of financial stocks. Wealthy investors are estimated to have pulled more than $10 billion (about 14.9 trillion won) from private credit funds in the first quarter alone.

According to the Financial Times (FT) on the 17th, redemption requests submitted in the first quarter to private credit funds managed by firms including Blackstone, BlackRock, Cliffwater and Morgan Stanley are estimated at $10.1 billion.

FT reported that these asset managers agreed to pay out only 70% of the requested redemption amounts. Redemptions are expected to rise further, with Blue Owl, Ares Management and Apollo Global still compiling redemption totals. Concerns are also growing over “domino redemptions,” in which withdrawals from large funds spill over into redemption pressure on other small and mid-sized private credit funds.

If the funding spigot tightens for companies that have raised astronomical sums in the private market to invest in artificial intelligence (AI), it could lead to the bursting of a mega-bubble. John Zito, head of Apollo Asset Management’s asset-management division, warned that “it is dangerous to underestimate the problem simply because the performance of listed software companies that borrowed via private lending looks strong,” adding that “redemptions could continue for the next few quarters.”

Goldman Sachs said last week that short sellers mounted a concentrated attack on financial stocks worldwide. More hedge funds are betting on declines in financial shares on the view that ties between financial companies and private credit are close. With Wells Fargo and JPMorgan Chase tumbling, the S&P Financials sector index is down 11% so far this year.

Choi Man-soo, bebop@hankyung.com