Goldman pitches a new big short
The Wall Street bank has been calling hedge funds with a strategy to short software loans
So you want to short a software loan
Last year when the FT revealed that Apollo Global Management had wagered against the auto parts supplier First Brands, there was something of a frenzy among big credit traders.
DD reporters were inundated with calls from curious portfolio managers wondering how exactly the private investment giant had executed the trade.
In the months that followed, including after the FT unveiled that Apollo had also shorted the loans of software companies vulnerable to AI, credit funds began hunting around for ways to pull off similar bets.
Enter Goldman Sachs, the powerful investment bank now widely known for betting against bundles of shoddy mortgages before the 2008 financial crisis.
It has been informally calling clients in recent weeks with a relatively niche way to bet against corporate loans using so-called total return swaps, derivatives that would allow investors to profit if a loan price declines, the FT scooped.
The trades would allow hedge funds to wager against software companies that have financed themselves in the $1.5tn US leveraged loan market, many of which were taken private in multibillion-dollar leveraged buyouts. Private equity firms spent hundreds of billions of dollars buying these companies up from 2020 to 2024. And now, their business models are under serious threat with every new update from Anthropic.
Goldman is not just pitching its clients on the trade. It has received a number of requests in recent weeks from traders keen to short loans to technology companies, especially after publicly traded software companies began to plummet at the start of the year.
Helping clients short corporate loans is a sensitive business. PE groups are some of the bank’s most important clients, paying lucrative fees each year, and other parts of the bank compete to underwrite these types of loans.
Using swaps to short loans isn’t entirely new. While some specialised hedge funds have pulled off these trades, multiple investors told the FT that they had been unable to find counterparties willing to take the other side of the bet.
While there’s been a lot of interest, it’s not entirely clear how many will get done. One person familiar with the matter said Goldman had not yet executed any of these trades.
“As a market-maker, we obviously engage constantly with clients on facilitating the trading strategies they want to execute,” Goldman said. “This happens every day, across many asset classes, in every market environment.”