In order for a Brazilian market participant to track the S&P 500^® through equity index futures, they must first convert Brazilian reais to U.S. dollars and then use U.S. dollars to enter a position in equity futures. This transaction involves two sources of risk: equity risk and currency exchange risk.

To address the currency exchange risk faced by Brazilian market participants, S&P Dow Jones Indices launched the S&P 500 Futures Quanto USD-BRL Currency Adjusted Index (S&P 500 Futures Quanto USD-BRL Index) on Nov. 1, 2024. The index provides a measurement of U.S. equities futures for Brazilian market participants. It does this by measuring the performance of the nearest-maturing quarterly E-mini S&P 500 Futures contract trading on the B3 exchange, following a quarterly roll¹ schedule.² Additionally, it integrates a quanto currency adjustment, which settles daily returns in BRL rather than the currency of denomination. This currency adjustment seeks to mitigate currency exchange volatility.

To illustrate the currency risk component, we compared the performance and risk characteristics of the S&P 500 Futures Quanto USD-BRL Index against the S&P 500 Futures Index (B3) (USD), which follows the same futures methodology but without the quanto currency adjustment. Historically, the S&P 500 Futures Quanto USD-BRL Index offered similar cumulative and periodic performance when compared with the unadjusted index (see Exhibit 1).

Moreover, the S&P 500 Futures Index (B3) (USD) had a historically high correlation and a similar risk profile when compared to the underlying index (see Exhibit 2). Since inception, the S&P 500 Futures Quanto USD-BRL Index closely tracked the unadjusted index, having an annualized tracking error of 0.2%.

Furthermore, the quanto adjustment led to outperformance on a total return basis as well. From Jan. 31, 2015, to Feb. 28, 2025, the S&P 500 Futures Quanto USD-BRL Currency Adjusted Index has delivered a cumulative excess total return of 350% relative to the unadjusted index.

This is because futures total return indices incorporate excess return and the interest earned on hypothetical fully collateralized contract positions. Exhibit 3 demonstrates the substantial cumulative impact when incorporating the daily CETIP interbank overnight rate on a fully collateralized³ position to calculate total returns. Historically, the S&P 500 Futures Quanto USD-BRL Currency Adjusted Index earned strong returns on top of the equity index futures return due to an environment where Brazil's interest rates remain relatively high.

In summary, the S&P 500 Futures Quanto USD-BRL Currency Adjusted Index measures U.S. large-cap equities, and has historically mitigated currency exchange risk, allowing market participants to avoid the impact of BRL/USD fluctuations. Additionally, it has provided additional outperformance due to Brazil's interest rate environment.

¹ Roll refers to the process of closing a position in a futures contract that is nearing its expiration and simultaneously opening a new position in a futures contract with a later expiration date.

² The roll frequency schedule occurs over a three-day roll period quarterly in March, June, September and December, effective after the close of the third, fourth and fifth business day preceding the last trading date of the futures contract. The index distributes the weights equally each day over a three-day roll period. For more details, please refer to the S&P Futures Indices Methodology.

³ Collateralized refers to a financial arrangement where an asset is pledged as security for a financial obligation, serving as a guarantee.

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In recent blogs we examined why private credit has been growing, as well as the potential opportunities and risks associated with the asset class. Now, we turn to the future of this evolving market, examining the trends shaping its growth, the role of institutional investors and how private credit may continue to develop as a mainstream investment strategy.

Scaling and Expanding Private Credit

Private credit could be poised for further expansion as investors seek higher yields and alternative sources of return. To sustain this momentum, private credit firms are refining their strategies, focusing on scalability and diversification. This includes expanding into new geographies and industries, as well as exploring specialized lending approaches like asset-backed lending and opportunistic credit.

Advancements in technology are also playing a role. Data analytics and automation are being integrated into underwriting and risk assessment processes, improving efficiency and allowing firms to manage portfolios more effectively. Additionally, new product structures—such as interval funds and evergreen vehicles—are being explored to attract a broader investor base, offering more flexible access to private credit.

Business Development Companies and Market Evolution

The rise of Business Development Companies (BDCs) has contributed significantly to the growth of private credit in recent years. These investment vehicles provide financing to small- and medium-sized enterprises (SMEs), often through debt or equity investments. Their structure allows investors to gain exposure to private credit without sacrificing the oversight and transparency required by regulators in public markets.

However, since BDCs trade on public exchanges, they can be influenced by broader market fluctuations. This means that while they offer a gateway into private credit, their performance may still be affected by equity market dynamics.

Institutional Investors and Market Maturity

Institutional investors—including pension funds, insurance companies and endowments—are playing an increasingly important role in shaping the private credit market. Their long-term investment horizons and substantial capital commitments may help stabilize the asset class.

As these investors allocate more capital to private credit, they are also driving improvements in governance, transparency and risk management. Their due diligence processes set higher reporting standards, encouraging greater consistency across private credit funds. At the same time, institutional investors are fostering innovation by backing niche strategies and specialized lending platforms, helping to broaden the range of investment opportunities in the space.

As participation from institutional investors continues to grow, the private credit market may benefit from enhanced liquidity, lower volatility and a more structured approach to investment—helping solidify its place as a mainstream asset class.

The Road Ahead for Private Credit

Looking forward, private credit is expected to play an increasingly prominent role in the financial landscape. With banks still facing regulatory constraints that limit lending, private credit is likely to continue to fill financing gaps for businesses—especially in the middle-market segment.

The growing involvement of institutional investors, along with ongoing innovation in product structures and risk management, may contribute to further maturation within the asset class. As a result, private credit may become even more integrated into investment strategies, offering a potential combination of income and diversification.

While challenges remain, including liquidity constraints and market saturation concerns, private credit's historical performance suggests that it may continue to attract interest. As market participants seek new sources of return in an evolving financial environment, private credit is well-positioned to play an expanding role in the investment landscape in the future.

Learn more in our recent analysis, "The Rapid Rise of Private Credit."

Learn more about Private Investment Benchmarks

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This blog was co-authored by Nicholas Godec and Ricky LaBelle.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

The S&P 500^® recently entered a "correction," a term used when the price index falls by more than 10% from its highs. It may yet decline further, the fact of which might tempt market participants to delay equity purchases until, say, the index has declined by 20%—which would define the start of a "bear market." The potential relative merits of "waiting for a discount," as examined historically via the nearly seven-decade-long record of the S&P 500, offer an intriguing perspective.

We began with every trading day in The 500™'s history on which the closing index level was not already 20% or more below the prior all-time high. For such days, we then measured how long it was before a 20% decline first occurred and what the overall change in the index level was over that period. Exhibit 1 shows the length of time in years of such waiting periods, historically.

The average waiting time was 3.0 years, while among the smaller sample of days when the index was already 10% or more down from a high (but not yet 20% down), the wait for a bear market was almost as long—equal to 2.1 years.

Sometimes, the index rose more than enough to offset the subsequent decline. At the historical extreme: from Nov. 29, 1988, it was over 12 years until the next bear market began, by which time the index had risen a cumulative 336% (including the final decline). Exhibit 2 shows the change in the index level during the waiting period associated with each starting point in history, and Exhibit 3 shows the accompanying distribution of those index changes, ignoring zero values.

Most of the time, waiting meant a slightly lower index level—the median index change was a decline of 1.7%. However, some of the time, the index change was highly positive, which led to an average index change equal to a 30.0% increase. Restricting to the days when the index was down 10% or more, but not yet 20% down, the average index change during the wait was, again, almost as material, equal to a 22% increase.

Exhibit 4 shows equivalent statistics using declines of 1%, 2%, 5%, 10%, as well as the original 20%. The sample size of "start points" get smaller down the table, as the proportion of days when the index was already in such a decline increases.

Overall, the pattern was similar for smaller declines: the median index change during the wait for a discount was a small decrease, but the average index change was positive, and the maximum index change was much higher. In other words, most of the time, waiting resulted in a small discount. But some of the time, waiting meant missing out on large gains.

The well-known money manager Peter Lynch once quipped that "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves." That may be true. As to whether the current S&P 500 downturn represents a buying opportunity, of course, only time will tell.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

The private credit market has seen significant growth in response to regulatory shifts, pursuit of yield and increased awareness of its unique characteristics. A previous blog explored its rise, and in this post, we will analyze private credit's comparative performance, consistency and correlation to public markets—particularly broadly syndicated loans (BSL), which share private credit's illiquidity and complexity.

The Allure of Private Credit

Interest in private markets is driven largely by the illiquidity premium that often accompanies lock-up periods. Over the one-year period ending Dec. 31, 2023, public and private credit performed similarly (see Exhibit 1).

However, over a 10-year horizon, private credit indices exhibited stronger performance (see Exhibit 2). Notably, all indices declined during March 2020's COVID-19 shock, but private credit demonstrated a stronger recovery, illustrating the divergence between private and public markets.

In the first five years of the period studied, private credit typically delivered higher returns than public credit, though investment grade bonds occasionally outperformed. A study by PineBridge Investments found that private credit outpaced the BSL market by approximately 157 bps on average, largely due to its illiquidity premium.¹

Understanding Correlation in Private Credit

To further analyze private credit's behavior, we examined correlation between public and private credit indices (see Exhibit 3).

• Investment grade bonds show little correlation to private credit strategies
• High yield bonds have notable correlation with all private credit strategies
• Leveraged loans exhibit strong correlation (80% or higher) with private credit, except for subordinated capital

This suggests leveraged loans may be a useful public market comparison for private credit, given shared characteristics such as floating-rate coupons. It also highlights how credit risk, rather than interest rate sensitivity, drives performance in these instruments.

Navigating Risks in Private Credit

Private credit involves lengthy lock-up periods (typically 7-10 years) and illiquidity, limiting investors' ability to exit positions. While private lenders cater to borrowers who are unable to secure traditional bank loans, private and public credit markets differ in liquidity and syndication.

In the public BSL market, loans are syndicated and actively traded, leading to price fluctuations. Private credit loans, though, are primarily "buy and hold," not subject to syndication and generally unavailable to the broader market. This means investors manage capital calls and distributions over time while maintaining committed capital obligations.

In addition, private credit's rapid growth raises questions about sustainability and potential oversaturation. Deal-making has kept pace with demand, but long-term durability remains uncertain.

Private credit managers negotiate preferred terms in loan agreements, but these require time and extensive assessment. Many private credit loans feature floating-rate coupons priced above the secured overnight financing rate (SOFR). With potential interest rates decreases, it remains to be seen how private credit will compete with, or complement, public markets as investor demand continues.

Learn more in our recent analysis, "The Rapid Rise of Private Credit."

Don't miss our next blog where we explore the future of private credit.

Learn more about Private Investment Benchmarks

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This blog was co-authored by Nicholas Godec and Greg Vadala.

¹ Wolfson, Kevin and Joseph Taylor. "Private Credit vs. Broadly Syndicated Loans: Not a Zero-Sum Game." PineBridge Investments. July 2024.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

The results from our SPIVA U.S. Year-End 2024 Scorecard demonstrate another challenging year for active managers, with 65% of U.S. large-cap funds underperforming the S&P 500^®, slightly above the report's 24-year historical average of 64%. But small-cap managers fared significantly better, with only 30% of small-cap funds underperforming the S&P SmallCap 600^®, the lowest underperformance rate on record. What might explain the widely contrasting fortunes between large-cap and small-cap managers?

2024 was characterized by positive skew in the S&P 500's constituent returns, as shown in the top half of Exhibit 2, with the average return outpacing the median return by 1.6%, evidencing a longstanding challenge for more concentrated active managers, who may be less likely to own these top performers in their strategies. Because the largest stocks in the index were among the best performers, the index's return of 25.0% was well above the simple average, an additional headwind for managers who were underweight in the largest stocks. These results are not surprising, as the average return has been greater than the median for The 500's constituents in 20 out of the past 24 years.

Combining these elements of skewness and large-cap outperformance, a simple way to analyze the conditions for stock selection is to measure the percentage of constituents that beat the benchmark. Only 28% of member stocks beat the S&P 500 in 2024, which is the second-lowest percentage in 24 years and close to the 26% in 2023, which was another challenging year characterized by large-cap dominance.

Turning our attention to small-cap managers, the bottom half of Exhibit 2 shows that 44% of S&P SmallCap 600 constituents beat the benchmark in 2024, close to the long-term average of 45%. The S&P 600^®'s return distribution was positively skewed as well, with an average return exceeding the median by 2.8%, consistent with the positive skew in 22 of the past 24 years. Just as we observed with large caps, the S&P 600 return of 9% was above the average, indicating that larger stocks within the small-cap benchmark outperformed.

Both large- and small-cap managers shared relatively slim prospects for stock picking, characterized by a positively skewed distribution of benchmark returns and the outperformance of larger stocks. But small-cap managers may have benefited from ample opportunities to tilt up toward outperforming large caps, with a 16% return differential separating the S&P 500 and the S&P 600, the widest differential in the SPIVA Scorecard's history. Exhibit 3 illustrates that small-cap fund underperformance rates historically tended to improve with large-cap outperformance.

While conditions for stock picking were generally tough in 2024, small-cap managers had a banner year. The SPIVA U.S. Year-End 2024 results provide evidence that style bias may play a major role in explaining active manager outperformance across the capitalization spectrum and is importantly an indication that true stock selection skill may be more rare.

The author would like to thank Nick Didio for his contributions to this blog.

The posts on this blog are opinions, not advice. Please read our Disclaimers.