Please note: The statements in this publication are intended to encourage the exchange of individual investment experiences. All views expressed are solely those of the respective authors and are not affiliated with or reflective of any company’s activities. Investing involves risks. Please refer to our disclaimers.
Over the course of this year equity markets have seen sharp declines of around 20 – 25%1, triggering a wave of uncertainty about the broader economy. While last week’s abrupt correction has understandably shaken investors’ confidence, it is also opening up a range of compelling investment opportunities 2 —especially in credit markets. Let’s connect these dots.
Sudden Shocks vs. Slow Drifts
The greatest threats in financial markets aren’t gradual declines — they’re sudden shocks. What we’re witnessing right now is exactly that: a market shock, not unlike the one triggered by COVID-19 in 2020. Why does this happen?
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Many investors managing large portfolios are bound by strict risk limits — whether self-imposed or regulatory. These constraints are often rigid and enforced automatically, with little to no room for human discretion. Once certain thresholds are breached, markets can enter a self-reinforcing feedback loop that accelerates the downturn.
In contrast to slow, steady declines — which allow investors to de-risk gradually and reallocate capital into safer assets like cash — sudden price shocks provoke a drastically different response.
When initial selling begins, certain institutional investors — particularly hedge funds employing leverage — are forced to liquidate positions immediately, regardless of current valuations. In these moments, the idea of a “fair market price” becomes irrelevant. The market-clearing price becomes whatever level is needed to absorb a wave of urgent sell orders. Time becomes the enemy.
As selling pressure intensifies, the most leveraged institutions begin dumping assets well below fair value, simply to meet margin requirements or maintain compliance with risk constraints. This is when panic selling takes hold — not driven by emotion, but by automated, algorithmic systems tasked with enforcing portfolio risk limits.
Eventually, institutional managers, even those running diversified portfolios of uncorrelated assets, run out of positions they want to sell — and begin selling whatever they can, wherever there are still buyers offering remotely reasonable prices.
In a counterintuitive turn, asset managers often begin by selling their highest quality assets first. Why? To minimize the discounts they take when forced to sell. High-quality, liquid assets fetch better prices, allowing managers to raise cash more efficiently. But this move has unintended consequences. As a result, correlations across asset classes begin to spike. Assets that are typically uncorrelated suddenly start moving together. This is how volatility spills over into traditionally “safe” markets. Government bonds, high-grade credit, and other liquid public instruments are sold off en masse — not due to any underlying credit concerns, but simply to meet margin calls or to rebalance portfolios within risk limits.
Adding further fuel to the fire are the banks. During periods of heightened volatility, they often respond by tightening margin requirements. This forces leveraged investors to inject additional equity or cash into their portfolios — often at the worst possible time. The result? More distressed selling in a compressed timeframe, which further accelerates the downward spiral.
What we witnessed last week may only be the beginning of a broader downturn. The risk is real — and it’s systemic.3
A Family Office View Point
As a family office managing a long-term, diversified portfolio, we’ve seen this kind of market behavior many times before.
This is precisely why we have steered clear of public equity markets at current valuations for years. Instead, our focus has remained on private markets and credit opportunities — areas that tend to be more insulated from short-term volatility, liquidity crunches, and the self-reinforcing feedback loops that plague public markets during times of stress.
Feedback Loops and Medium Term Market Impact
Retail investors are feeling the pressure too. Visible losses in self-managed stock portfolios — particularly pension accounts — are taking a toll on consumer confidence. Watching portfolio values drop 20% or more triggers fear, and with that fear often comes reactive selling.
It’s human nature: many retail investors, gripped by the fear of losing, begin selling into the downturn. In doing so, they unintentionally add fuel to the fire, reinforcing the very spiral they’re hoping to escape.
After having sold large positions, consumers feel poorer and less optimistic about their own personal future income. If this sentiment takes a hold for several weeks, real fear starts to spread and eventually consumers will reduce consumption.
After selling large positions, many consumers begin to feel poorer — and less optimistic about their future income. If this sentiment persists for several weeks, it can evolve into real fear. And when fear takes hold, consumer behavior shifts: spending slows, and people begin to cut back.
This drop in consumption is where market volatility starts bleeding into the real economy.
A Generation in Uncharted Waters
We’ve seen scenarios like this before — in 2008, in 2020 — and we’ve also seen recoveries.
But — and it’s a big but — those recoveries happened in a very different interest rate environment. Today, we’re in uncharted territory: a market shock unfolding against the backdrop of structurally higher rates. There’s now an entire generation of investors and consumers who’ve never experienced this kind of volatility in a higher-rate environment. How they respond — both psychologically and financially — remains to be seen.
Interest rates play a crucial role in how quickly markets can recover — particularly because they directly affect disposable income.
In past downturns, interest rates were historically low, which helped consumers rebound quickly. That rebound in spending supported corporate earnings and restored market confidence. Today, however, rates are sitting at generational highs — and there’s little indication they’ll be cut meaningfully any time soon.
While there are certainly factors that could point toward eventual rate reductions or policy intervention to stabilize sentiment, those changes will take time. Rate cuts, when they do come, are likely to be gradual — and could even introduce further uncertainty in the short term.
For now, uncertainty dominates — and markets are responding with volatility.
A Brighter Outlook in Private Credit
Amid the chaos, there is a silver lining — particularly in private and credit markets.
Over the past few months, we’ve been patient. As valuations became increasingly unattractive, we raised our cash positions to record levels. We weren’t alone: many credit managers postponed or downsized capital calls, a clear sign that too much capital was chasing too few quality deals.
We expect that dynamic to shift.
As banks move to strengthen their liquidity buffers and institutional investors become forced sellers, opportunities are beginning to emerge. In this environment, having excess liquidity is not a weakness — it’s a strategic advantage. Demand is rising for flexible, reliable credit providers who can step in when traditional sources pull back.
And we’re ready.
Whether it is private equity firms needing to urgently refinance portfolio companies, banks selling loan books at a discount, or borrowers offering stronger collateral to secure financing—opportunities are increasing.
The Inverse Credit Market: Better Returns and Safer Deals for Investors
We believe the credit markets are about to turn. The balance of power is shifting — from borrowers to lenders — as capital becomes scarce and deal flow picks up. Attractive opportunities are no longer hard to find. What’s scarce now is capital. And that changes everything.
This is exactly the environment we seek: protect investor capital and receive fair, contractual returns.
As lenders, we are now positioned to negotiate stronger terms:
- Better pricing
- Lower leverage levels
- Stricter covenants
- Improved collateral packages
Importantly, yields in the investment-grade space have become attractive again — and those returns are cascading down into the non-investment-grade market. We’re now seeing a growing pipeline of deals with asymmetric risk/reward profiles that were simply not available just months ago.
We believe the lending side of the market will play a stabilizing role in the broader financial system over the next 6 to 12 months. And in the process, credit investors will be rewarded — with better risk-adjusted returns: more return for the same level of risk, or the same return with less risk.
Equity Fluctuates. Credit Compounds.
While we sympathize with equity market investors navigating extreme volatility — and potentially a structural reset to lower levels — we remain focused.
As credit investors, we’re not chasing 20% annual returns. We don’t often have much to add to dinner table conversations about the latest 3x tech stock rally.
But we also don’t experience 20 – 40% drawdowns.
Instead, we see steady yields, predictable cash flows, and the power of compounding at work. We believe that consistent, disciplined investing in private credit markets will continue to deliver superior risk-adjusted returns — not just in moments like these, but across full market cycles.
We have been investing in Private Credit for many years. For those family offices, institutional investors, and high-net worth individuals interested in earning a return premium, with a certain degree of capital protection and resilience during economic downturns, as well as high levels of diversification, Private Credit may present an opportunity that should not be ignored.4
Year-to-date performance of the S&P500 and Nasdaq, including futures performance on 7th of April 2025.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Investing involves risk. Any expression of opinion is based on own research. Historic data may be interpreted differently under different circumstances. No advice. Only for professional investors who can afford to lose capital invested. Protections may or may not exist during different periods of time. In general, investments may be illiquid and not accessible for investors for extended periods of time. Products may not be regulated. Illiquidity and capital losses are inherent sources of risk. Never invest without understanding all risks which may materialise. Data can be interpreted differently and different sources may lead to different conclusions.
Speculation; for illustrative purposes; only personal opinions.
Source: own research: please refer to footnote (1).
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