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Pirkko Juntunen
Hedge funds are moving further into private credit, bringing new sources of capital to a market already expanding rapidly. But rather than directly displacing established direct lenders, their growing presence is creating a broader financing universe in which different types of capital can serve different needs.
For private equity sponsors, that means more choice. For lenders, it puts greater emphasis on origination, relationships, and the ability to structure capital around increasingly varied situations.
Hedge funds have been active in credit for decades, but their presence in private credit is becoming more visible as the market expands beyond traditional sponsor-backed direct lending.
Moves by firms including Millennium Management, Point72, Third Point, as well as new hedge funds doing private credit such as Arini and Sona to build private credit capabilities have highlighted the trend.
Yet the distinction between hedge funds and private credit managers remains important, says Tina Söderlund-Boley, co-founder of 59 Capital Partners.
The alternatives market is increasingly segmented according to liquidity and the ability to hold illiquid, privately valued assets. Hedge funds are generally open-ended, with investors able to redeem periodically, while private credit funds typically use closed-end structures with committed capital and no regular investor redemptions.
As a result, hedge funds and private credit managers “generally operate in distinct parts of the credit market, with relatively limited overlap in the underlying transactions they pursue”, Söderlund-Boley says.
Alec Lingorski, managing director at Alvine Capital, similarly sees hedge funds as bringing something different rather than simply competing head-on with established direct lenders.
“There is an opportunity set where there is growing volatility in the market. They can come in with unique solutions and flexibility others can’t achieve,” Lingorski says.
That capital may be more expensive than traditional direct lending, but it can offer shorter-term financing, bespoke structures or solutions for situations that do not fit conventional private credit mandates.
“They’re not there to directly compete with the direct lenders. The hedge funds transitioning into private credit typically target higher returns, while their underlying borrowers have distinct financing requirements and structural needs,” he says.
The expanding lender universe nevertheless gives PE sponsors more financing options.
Global private credit assets under management have surpassed $2trn, according to PwC’s 2026 Global Private Credit Survey, which puts its base-case projection at $3.4trn by 2030.
The growth is also bringing more specialist lenders into the market.
“This should broaden the availability of credit for PE sponsors beyond the established brand-name lenders and provide sponsors with a wider range of financing options,” Söderlund-Boley says.
That can be particularly valuable when a transaction does not fit neatly into a conventional senior direct lending structure.
For established lenders, however, more competition does not necessarily mean a race to the bottom.
According to a spokesperson for a large Danish pension fund, the original direct lending funds before the global financial crisis had a more opportunistic character, as banks financed the upper part of the capital structure.
Some managers offering senior corporate credit today have their roots in the hedge-fund industry, while an even larger number have come from banking, the spokesperson says.
As the asset class has matured, competition has increasingly affected terms, with managers competing on pricing and documentation.
New fund structures, including evergreen vehicles with lower fees and no carry, are also giving investors more ways to access the asset class.
“If the excess return relative to liquid loans declines as a result of increased competition, costs must decrease correspondingly in order to preserve alpha,” the spokesperson says.
That makes scale increasingly important, particularly the ability to source, evaluate and execute transactions efficiently.
More choice does not mean that all lenders are interchangeable.
Established direct lenders retain an advantage in conventional sponsor-backed transactions through long-standing relationships, underwriting expertise and committed capital.
“If you’re a sponsor and you just want a standard loan for your buyout deal, you’re probably not going to go to a hedge fund. It’s going to be the usual lenders,” Lingorski says.
Hedge funds may instead have a role at the margins of the market, where the financing requirement is more complex, the credit is weaker, or greater flexibility is needed.
“There is quite a lot of capital floating around. One of the benefits that the hedge funds have is their flexibility on structures,” Lingorski says.
That could include special situations, restructurings or assets that have become difficult to finance through conventional channels.
“Maybe some clever hedge funds can come in and restructure” such assets, he says.
For private-credit managers, the implication is that simply having capital available will not necessarily be enough.
Söderlund-Boley says capital, structuring expertise, sector knowledge and relationships all matter, although their relative importance varies between transactions.
“Origination remains crucial, and strong, long-standing relationships with sponsors, borrowers and advisers are an important part of that,” she says.
Structuring expertise could become even more important if credit conditions deteriorate.
“If default rates rise from current levels, the ability to structure transactions with appropriate protections and downside resilience will be critical,” Söderlund-Boley says.
Technology may also be reducing some of the traditional differences between lenders, particularly around speed of execution. But Lingorski cautions that speed alone is not necessarily a differentiator.
“Fast is not always best, nor is it cheap,” he says.
At the same time, the boundaries between strategies are becoming less clear-cut, with some managers developing hybrid hedge fund and private credit structures.
“There are several groups that are coming out with hybrid hedge fund-private credit structures, blending more speciality lending with traditional liquid assets,” Lingorski says.
The result is therefore less a straightforward battle between hedge funds and direct lenders than an increasingly diverse private credit market.
For sponsors, that should mean more choice when a financing requirement does not fit neatly into a traditional structure. For lenders, it puts a premium on knowing where their capital is most competitive, maintaining strong origination networks and delivering structures capable of withstanding changing credit conditions.
And for institutional investors, the expanding manager universe creates more potential sources of return, but also makes the selection process more demanding.
More capital may be entering private credit. The challenge for every participant is increasingly to know which capital is right for which deal.
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