Who Wins from Carnage in the Credit Markets?
The global economy has had to weather many storms in recent years, from a great recession to the coronavirus pandemic. Yet one of the most significant recent examples of market upheaval has been the major volatility we’ve seen in the credit markets. While turmoil in the credit markets typically leads to losses, there is actually a subset of market participants that can benefit greatly from these changes – let’s explore who they are.
Understanding the Credit Markets
Before we get into who wins as a result of credit market upheaval, let’s first make sure we have a clear understanding of the credit markets. The credit markets are made up of entities that borrow and lend money, typically in the form of instruments like bonds. Generally, borrowers in the credit markets fall into one of two categories: investors and companies. Companies borrow the money to cover their operations, while investors tend to use the money to put into higher-yielding investments.
The credit markets, like other markets, are subject to fluctuations. These can be caused by changes in the macroeconomic environment, changes in the creditworthiness of entities involved, or even just by general market unwillingness to lend or borrow. When credit markets face downturns, we say we are in a state of “carnage.” So who exactly benefits from these market conditions?
Who Benefits from Carnage
Interestingly, when the credit markets are in a state of carnage, some market participants can actually make a lot of money. In particular, there are three groups of people who benefit from high levels of volatility:
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Risk-Loving Investors: One important group of beneficiaries is risk-loving investors. These investors tend to have a contrarian approach to investing, meaning they seek out cash-rich investments in times of market downturns. While these investments can be risky, the potential reward of high returns is often enough to attract investors.
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Hedge Funds: Another major winner during volatile times are hedge funds. Hedge funds are private funds that are typically used to make highly risky investments, usually in complex financial instruments like derivatives. During turbulent times, particularly in the credit markets, hedge funds can position themselves strategically and make a large profit from betting against market sentiment.
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Loan Officers: Lastly, loan officers are another major winner during times of market chaos. Loan officers typically provide loans to companies or investors during times of financial strain, negotiating terms and rates to be more favorable for the lender. In times of market volatility, loan officers are able to capitalise on their knowledge of the markets and their relationships with lenders, providing customers with access to quicker and more beneficial loans.
It’s no surprise that volatility in the credit markets causes a lot of distress for many. On the other hand, some market participants are able to benefit from the turbulence and make a lot of money even in the face of financial uncertainty. In particular, risk-loving investors, hedge funds, and loan officers are likely to remain some of the biggest winners during periods of chaos in the credit markets.
