Goldman Sachs has informed hedge fund clients that a planned product designed to facilitate short positions in the leveraged loan market is not yet ready for rollout, despite growing investor interest, according to a report by Bloomberg.
The bank has been developing a total return swap structure that would allow hedge funds to take bearish positions on leveraged loans without directly holding the underlying assets. However, according to sources familiar with the situation, the initiative has been delayed as Goldman continues to refine key aspects, including legal documentation. No trades using the product have been executed to date.
Demand for such a tool has increased as investors look to profit from perceived weakness in the roughly $1.4tn leveraged loan market, particularly within the software sector. Concerns around the impact of artificial intelligence on business models, combined with high leverage levels stemming from private equity buyouts, have driven a reassessment of credit risk.
The structure of the leveraged loan market presents challenges for short sellers, as loans are privately negotiated and lack the liquidity and borrow mechanisms typical of public equities. Synthetic instruments such as total return swaps offer a potential workaround by enabling investors to gain exposure to price declines.
