Investors cool towards private credit and passive equities, Goldman Sachs says

A Goldman Sachs survey of 333 allocators managing over $1 trillion reveals a notable shift in institutional investor allocations, with increased caution towards passive equities and private credit, and growing interest in hedge funds. Specifically, 27% of investors now plan to cut passive equity exposure (up from 19%), while only 31% intend to commit to private credit in 2025 (down from 41%). Conversely, 37% plan to allocate to hedge funds, driven by market volatility and economic uncertainty, though capital locked in private markets may constrain these shifts.

Analysis

A recent Goldman Sachs survey of 333 institutional allocators, collectively managing over $1 trillion in assets, indicates a significant shift in investment strategy amid growing economic uncertainty. There is a marked increase in caution towards passive equities and private credit. Specifically, 27% of investors intend to reduce exposure to passive equities in the second half of the year, an increase from 19% in the first half, driven by market volatility from tariff shocks. Concurrently, private credit is losing its appeal, with intentions to commit capital in 2025 dropping to 31% from 41% a year prior. This decline is attributed to concerns about the U.S. economic outlook and a lack of valuation transparency, with some investors reportedly considering redemptions from funds with opaque portfolio marks. In contrast, hedge funds are gaining favor as a perceived haven from volatility; 37% of allocators plan to increase their investment in the sector, while the portion intending to decrease has fallen from 10% to 6%. This potential reallocation is, however, constrained by capital locked in private market commitments, though the report anecdotally suggests these pressures may be easing.

Key Decisions for Investors

• Investors should review their exposure to broad-market passive equity funds, as institutional sentiment is shifting towards active management in anticipation of continued volatility and potential stagflation.
• Exercise increased due diligence on private credit holdings, specifically questioning valuation transparency and the impact of a weaker economic outlook on underlying private companies.
• Consider increasing allocations to hedge fund strategies, particularly those that can capitalize on market dislocations and macroeconomic trends, as institutional flows are poised to move in this direction.
• Monitor capital distribution rates from private market funds, as an increase in liquidity could accelerate the reported allocation shifts and impact performance across asset classes.