Fund managers want more private credit and more hedges

Clearwater Analytics published its survey of 250 senior executives under a title that does the editorialising for it: The Crowded Trade. Ninety per cent of the respondents, who run money across the US, Europe and Asia-Pacific, expect alternatives to claim a larger share of core portfolios within three years, and more than 90 per cent plan to raise their own use of them, private credit included.

Private equity, private credit, infrastructure and hedge funds share the alternatives bucket, and Clearwater's claim is that traditional, static allocation frameworks are being retired as a result. The consequence it draws is mechanical: liquidity requirements shift across public and private books at once, leaving redemption risk and the liquidity of the underlying assets to be managed together.

The survey population carries a caveat before the findings do, because the people answering run the money rather than allocate it. Read the responses as a statement of what managers intend to take to market as much as of what asset owners intend to buy. Clearwater's analysis is about behaviour, and the behaviour it captured most directly is hedging: 55 per cent of respondents increased their internal use of hedging mechanisms over the past year, and 79 per cent expect to lean harder on overlays over the next 24 months.

Overlays can shape the volatility a private credit sleeve reports without changing what the loans inside it would fetch if the sleeve had to be sold, which means a manager adding illiquid assets and a hedging budget in the same stretch of years is buying two things and paying for both. That inference is mine; Clearwater's framing runs alongside it, saying the rotation is forcing heightened redemption and underlying liquidity risk.

Keith Viverito, the firm's managing director for EMEA, put the implication of the title plainly: "What stands out," he said, "is how many firms are making similar moves, which matters because a strategy the whole market adopts together behaves differently than one only a few firms hold."

As this publication has argued, private credit's scarce input has moved to the balance sheet: the origination desks and warehouse structures that can securitise collateral, with capital the easier half to find. A near-unanimous intent to add alternatives runs into a deal pipeline that expands on its own schedule, which suggests the marginal borrower, not the marginal LP, sets entry terms in the next vintage.

Allocators who read 90 per cent as validation should price it instead as a warning about entry terms; the same intent held by nearly every manager in the survey is what compresses the spread available to the next one. The number to watch is the 79: whether it holds once overlays cost money in a market that stops falling.