Hedge funds flag growing private credit risks amid rising rates

[HONG KONG] Some of the world’s biggest hedge funds warned that risks are growing in private credit, adding to debate about how rising interest rates will impact the asset class after scrutiny intensified in 2026.

Private credit is currently facing bigger problems than the public market due to higher interest rates, slowing business growth and a wall of debt coming due in 2027 and 2028, Tony Yoseloff, chief investment officer (CIO) of Davidson Kempner Capital Management, said at the 2026 Global Financial Leaders’ Investment Summit in Hong Kong on Wednesday (Nov 4). 

Adding to those risks, about a third of US private credit loans have followed private equity money into the software industry over the last few years, Yoseloff said.

“It’s a software story. It’s a rate story. It’s an overvaluation story,” he said. 

While the private credit industry has grown rapidly in recent years, it has also seen several high-profile blowups and waves of redemption pressure that forced some funds to limit withdrawals.

Concerns have intensified recently as borrowing costs rise, adding to worries about the sector’s outsized exposure to software firms facing potential disruptions from artificial intelligence. 

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One warning sign is that the five-year cumulative default rate in the broader syndicated loan market has already exceeded levels seen during the 2008 global financial crisis, according to Sona Asset Management CIO John Aylward.

The private credit market shares many of the same sponsor borrowers and alternative credit managers, only with smaller and “inherently riskier” companies, he said. 

“It was a great decade plus for private markets, a world of low rates and a world of not enormous change,” Aylward said on the same panel. “Now we live in a world of higher rates and enormous change.”

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Investors have increasingly been monitoring private credit funds for risks as companies that loaded up on debt when interest rates were low face refinancing pressure as borrowings come due.

Elsewhere, Yoseloff said that Davidson Kempner, which splits its investments evenly between the US and overseas markets, sees a very wide universe of performing credit offering returns in the mid-teens with good cashflows.

Its liquid strategies have done more investments in Asia than Europe for a few years running, he said. 

Davidson Kempner likes first-lien lending in India and sees Asia convertible bonds as particularly attractive, he said. 

Meanwhile, Farallon Capital CIO Nicolas Giauque said the fund has seen its credit portion turn a corner after years of shrinking allocations, driven by the AI trade and US rate hikes that have created opportunities in triple C-rated debt.

The multi-strategy hedge fund invests in arbitrage, credit and long-short equities opportunities. 

Still, Giauque warned against using index-level hedges against systematic risks, given the October stock market correction was more pronounced at the sector level.

With equity indices increasingly dominated by AI-related names from Japan to Europe, investors should review the effectiveness of their geographical diversification, he said.

“There is more commonality of risk across the globe than there was a few years ago,” Giauque said. BLOOMBERG