Move with the markets: Investing in credit and derivatives

By SS&C Advent
31 October 2023

Given economic uncertainty, high interest rates, and protracted market volatility, “the new kings of Wall Street aren’t banks,” claims a Wall Street Journal headline, but the private funds investing in this space[1]. While we have been discussing the explosion in credit for at least a decade, the uncertainty of the last three years has galvanized investors, and “some analysts are concerned about private credit taking over the loan market.”[1]

While many experienced credit and bank debt investors are capitalizing on these conditions, even more firms are launching new strategies targeting this asset class; however, these are very nuanced and complex asset classes to account for operationally.

Achieving operational alpha with better technology

To give our community a deeper perspective on the evolution of credit and derivatives markets, our colleague Aani Nerlekar, Senior Director SS&C Advent, hosted a virtual panel, Move with the Markets: Investing in credit and derivatives, with industry veterans Peyman Ardestani of AOV and Timothy Schmidt of Schonfeld Strategic Advisors. The panelist each shared their experiences and thoughts on the complexities of managing credit funds and how firms can leverage technology to help move towards an automated future that enables:

  • Managing complex fund structures from an operational and accounting perspective
  • Eliminating operational hurdles when processing and administering both syndicated and private loans
  • Understanding the advantages of a managed services partner

Broadly syndicated loans vs. private loans – what is fueling the growth?

Much of the growth is fueled by new entrants to the market. Many firms that traditionally avoided credit are now diversifying their offerings, including single strategy managers and emerging funds with long/short equity strategies that are looking to private investments for growth[2]. As the panelists agreed, private credit always seems to be in the news, but now we’re seeing a growth in syndicate loans and CLOs. Moreover, many firms expanding to alternative and credit strategies are doing so because single-strategy funds no longer appeal to their investors. Yet, the question remains: how do these firms ensure they are prepared operationally to expand their strategies?

Expanding to credit? You’re not in Kansas anymore.

The catchphrase of this conversation was “nuanced” in that every loan and all the terms are “nuanced.” As one panelist mentioned, the nuance is important as there are many more reporting requirements, complexities, and idiosyncrasies around deal terms. As firms diversify, they must ensure the infrastructure and operations teams are flexible and can manage the nuance.

All the panelists agreed the three key components to consider when you prepare to expand: are your team, your technology, and reporting. Firms will need to focus their talent acquisition on teams that understand credit, including the different types of fund structures and how to manage different accruals on loans. This team will also need robust technology to handle credit and other alternative investments as new instruments come to market.

Moreover, firms also need to establish how they would like to structure their fund. A few examples of questions to ask include:

  • Do you have bottom-up or top-down accounting?
  • What are the structures or yields of your fund?
  • What type of reporting (daily, monthly, quarterly)?
  • Is anyone solving the manual problem?

Many new solutions are coming to market to solve various pain points in the credit space, particularly around its manual processing and minimal market data. As we head into 2024, there will likely be greater strides in automating and digitizing these processes. As one panelist noted, the market is “positively optimistic,” and perhaps we’re “close to an inflection point.”

What’s next?

As the industry continues its uphill trajectory, regulators are taking notice and are “concerned that so much money is going behind closed doors…[and] are rushing to catch up with new rules for private fund managers…” It’s a good time to ensure that you have the right technology and reporting infrastructure in place to manage this nuanced asset class.

To hear more from our engaging panelists, watch the full Move with the Markets webinar. As you explore investing in this asset class and how Geneva and SS&C Loan Data can support your investment strategies, contact us or request a demo.

[1] Matt Wirz, “The New Kings of Wall Street Aren’t Banks. Private Funds Fuel Corporate America,” Wall Street Journal. October 8, 2023

[2] Brian O’Neill, “Global Hedge Fund Industry: Accelerating out of the pandemic,” KPMG. December 2021

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