Getting short with private credit

In recent months, regulatory and market angst about the role of shadow banks – or Non-Bank Financial Intermediaries (NBFIs) – in global finance has centered around private credit and the systematic risks it poses.

The debate around those risks has sharpened in the wake of well-publicized borrower defaults and new restrictions on investor redemptions at several large private credit funds. At the same time, however, the industry has mounted a strong defense of its recent track record and continues to expand access to this asset class. In March, two of the largest investment banks – JPMorgan and Goldman Sachs – announced they’ve created baskets of publicly traded companies tied to the $1.8 trillion private credit market that give their hedge fund clients a structured way to take bearish positions.

A classic form of bearish position-taking is to short an asset or asset class. In its basic form, the investor borrows an asset such as stocks, ETF shares or bonds and sells it in expectation of buying back more cheaply when required to return it. But, while a useful measure of sophisticated investor sentiment, developing a timely – and actionable – signal for short interest is complicated by the desire of many short sellers to fly under the radar.

The task gets harder when there is limited information about the asset being shorted. This Quants Corner provides a holistic analysis of assets held in private credit linked funds tracked by EPFR, with a primary focus on the US market. When married with publicly available short interest data, we can identify the percentage of the ETF market being used as a vehicle for short exposure.

How many degrees of separation?

While private credit is inherently illiquid and difficult to short directly, shorting of related vehicles – private credit funds, CLOs, hedge funds – is something that can be tracked as a proxy for investor sentiment towards this fast-growing asset class. Private Credit Funds are investment vehicles that lend money directly to companies, negotiating the loan terms privately, outside of the traditional banks or public bond markets.

At the core of private credit markets are senior secured direct loans and BDCs which lend directly to private US middle-market companies.

EPFR’s granular data allows us to construct a tailored sample of private credit funds based on clearly defined selection criteria. Looking at the universe of over 156,500 mutual funds and ETF share classes with more than $73 trillion in AUM tracked by EPFR, funds were selected if either their fund name or benchmark name included relevant keywords such as private credit, private loans, private placements, lending, or business development companies (BDCs). These exist among the bond, equity and balanced fund universes that EPFR tracks.

The resulting group consists of 33 Private Credit Funds that have a combined AuM that exceeded $50 billion by the end of the first quarter of 2026. Half of those are ETFs, accounting for just over $3 billion – or 6% – of the group’s total assets, while four mutual funds focused on lending hold a good 80% of the total AuM.

Flows into these mutual funds and ETFs reflect a well-established pattern: multi-week stretch of inflows snapped by periodic outflows that are tied to the quarterly redemption schedule that these funds operate under. Entering this year, however, heightened market uncertainty has disrupted this pattern. Outflows have occurred more frequently and at greater magnitude than usual, with the week ending March 11 marking a record and 1Q26 the first quarter in which aggregate outflows exceeded inflows. Typically, inflows offset redemption activity and stabilize quarterly flows, but the absence of that counterbalance raises questions around sentiment. Should the trend persist, it will become more of a question about the underlying liquidity dynamics.

While the quarterly net inflow versus outflow ratio confirms increased market skepticism or caution on the institutional long only side, it’s not necessarily representative of the ETF market. But if investment banks, like the aforementioned JPM and GS, are utilizing ETFs to create products that short private credit, that information will appear in FINRA’s Equity Short Interest database, which “publishes the short interest reports it collects from broker-dealers for all exchange-listed and over the counter (OTC) equity securities.” The share of ETFs used as vehicles to short private credit can be observed, adding perspective on how players might try to take advantage of this uncertainty.

What happens if we combine FINRA data with our defined sample of 16 Private Credit ETFs?

Creating windows into the opaque

To start, we searched through the list of available issues on FINRA’s database for each of the Private Credit ETFs. Of the 16 ETFs in our defined sample, FINRA data on 14 is available with information on the number of shares sold short for these ETFs over time.

Not surprisingly, given the generally bearish narrative about private credit, the total count of shares sold short for these Private Credit ETFs has been increasing, with sharp spikes in recent months pushing them toward, or above, the seven million share mark.

While the total number is interesting, a more compelling data point is the total market value in USD of these shares sold short for all ETFs in our sample, providing a proxy for sentiment. The number of shares sold short for each ETF – derived from FINRA data – then becomes the first part of our equation, multiplying it by the price of that ETF over time¹. The calculation is as follows:

Charting the numbers derived from this calculation shows a complimentary pattern. But there are caveats.

The total net value of Private Credit ETFs sold short touched above the $100 million mark in February this year and dropped modestly in the following month with the current total above $97.5 million.

Looking for a high water mark

As ever, context is important. Players in the private credit space argue that current conditions are not exceptional by historical standards. To test this assertion requires a relative measure. One of those is the level of short exposure relative to the total AuM of the Private Credit ETF universe. This ETF short interest is a proxy for sentiment toward private credit, and is not a direct measure of shorting private loans.

To take it one step further, we look at the total value shorted as a percentage of EPFR’s total AuM for this select universe of 14 Private Credit ETFs using the following calculation:

As the chart below shows, short exposure to Private Credit has been gradually increasing since the beginning of 2022, climbing from less than 0.5% in that year to reach 2.5% at the end of 2024. That retreated to some extent, but last year ended with another record breaking 2.8%. Continuing to soar even further into this year, as of March 2026, short exposure relative to the size or AuM of the market they’re betting on – Private Credit ETFs – has reached a record 3.4%.

The six-month moving average is at a record-high of 2.4%, whereas the past five years have seen an average closer to 1.2%.

Answered and unanswered questions

While private credit funds have been in existence for over 40 years, their scale and speed of growth are raising new questions for financial quants. What is the critical mass for trackable Private Credit ETFs needed to generate a consistently credible short interest signal? Are there proxy asset classes that can be tapped for more timely directional signals of the private credit market?

On the question of signals and their validity, this Quants Corner has established percentages for a universe of Private Credit ETFs indicating the size of their short interest relative to the private credit market. That opens the door to the development of a factor that can be used in new or existing multi-asset quantitative models.

When it comes to proxies, the established proxy for risky debt is the high yield universe. EPFR’s coverage of High Yield Bond Funds has a long, and increasingly deep and granular, history.  Correlations between that market and the Private Credit space could be explored in future Quants Corners.




¹ This can be found on YahooFinance, Bloomberg, or similar resources.