hedge funds explore private credit amid operational challenges and market opportunities

Hedge funds have been increasingly focusing on private credit as an asset class, competing with private equity firms. This shift is a result of banks pulling back from lending to lower-rated and smaller companies after the global financial crisis.

Opportunities and Challenges

Multistrategy hedge fund managers have a relatively low entry barrier due to their existing sophisticated infrastructure, making the transition to private credit primarily a matter of capital allocation. However, the asset class is complex and requires robust operational systems to manage the intricacies of private loans. Hedge funds must ensure they can effectively track and enforce covenants, adding layers of complexity to the investment process.

Despite the challenges, the demand for private credit strategies is strong, with credit ranking as the second-most popular hedge fund strategy. The private credit market has grown significantly, attracting various hedge funds and private equity firms. While the journey into private credit is challenging, firms with the necessary infrastructure and operational capabilities can capitalize on the potential rewards.

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