Achieving Steady Returns in Private Credit

How do you know how steady a fund's returns are in private credit?

When evaluating a private credit fund, one of the most important questions is not just how high the returns are, but how steady they are. Investors seeking regular income often prize stability as much as yield. Fortunately, there are established measures that help you understand a fund manager’s ability to deliver consistent performance.

The Key Metric: Volatility

The standard measure of steadiness is known as volatility. In simple terms, volatility captures how much a fund’s returns bounce around over time. A fund with low volatility delivers returns that are smoother and more predictable, while a high-volatility fund experiences sharper swings.

In equities, volatility is a familiar concept, often expressed through standard deviation of returns. The same applies in private credit - you can calculate volatility by measuring how far the fund’s monthly or quarterly returns deviate from their average over a given periodPC article 2.

Why Volatility Matters

• Income planning: If you rely on private credit for monthly or quarterly income, low volatility means more predictable cash flow.

• Risk perception: Even if the headline yield is strong, high volatility may signal greater risk in the underlying loans.

• Portfolio role: Investors often turn to private credit as a diversifier against equity swings. Low volatility enhances that role.

  
  

Positive vs Negative Months: The “Hit Ratio”

Another useful measure is the percentage of positive versus negative months, sometimes called the “hit ratio.” This shows how often a fund delivers a gain in a given month compared to a loss.

• A fund with 95% positive months indicates a very steady track record.

• A fund with 70% positive months may still be attractive, but its cash flows are less predictable.

Investors often use the hit ratio alongside volatility to build confidence in a manager’s ability to smooth out returns through cycles.

How to Calculate Volatility

1. Gather monthly return data: Obtain at least three years of monthly returns if available. This data is often provided in a fund’s monthly performance reports or investor presentations.

2. Calculate the average return: Add up all the monthly returns and divide by the number of months.

3. Measure deviations: For each month, subtract the average return from that month’s return. Square the result.

4. Average the squared deviations: Add these squared figures and divide by the number of months.

5. Take the square root: This final step produces the standard deviation, which is the measure of volatility.

While the formula may look technical, most investors can simplify the process by using spreadsheet functions like =STDEV() in Excel or Google Sheets.

Where to Find the Data

To calculate volatility or the hit ratio, you need consistent monthly performance data. Sources include:

• Fund monthly performance updates: Most private credit managers publish monthly fact sheets with return figures.

• Investment platforms: Some online platforms aggregate fund return histories for comparison.

• Independent research providers: Specialist firms such as Preqin and Morningstar publish volatility and performance data across private credit fundsPC article 1.

If a manager does not make historical performance data readily available, that in itself may be a red flag. Transparency is critical in assessing steadiness.

Putting It Together

For investors considering private credit, return steadiness is just as important as yield. By calculating volatility and examining the hit ratio, you gain a clearer picture of whether a manager delivers consistent, reliable outcomes - or whether returns may fluctuate more than you’d like.

If you’d like to learn more about how private credit works, common pitfalls, and how to get started, check out our free course “Private Credit for Beginners”. It’s designed to help you understand this fast-growing asset class with clarity and confidence.

References

1. PitchBook Data – Global Private Credit Report 2023

2. Australian Financial Review – Growth of Non-Bank Lending in Australia

3. CFA Institute – Alternative Investments: Private Debt

4. Preqin – Private Credit Fund Structures and Liquidity

   
   

Disclaimer: This article is for general information and education only. It does not take into account your personal objectives, financial situation, or needs. Nothing here should be considered financial advice, investment advice, or a recommendation. All investments carry risk, and you may lose money. Before making any financial decisions, consider seeking independent advice from a licensed professional.