By Johann M Cherian and Jayasree Prabhu
Sept 28 (Reuters) - Wall Street is busy scouring AI stocks for signs of a bubble, but a new hedge fund tied to famed short seller Michael Burry is coming to the market eyeing more consequential warnings of rising froth elsewhere - in private credit loan books.
Minerva Investment Management, a short-biased fund by Laks Ganapathi which has hired Burry as a senior adviser, is scanning sectors spanning healthcare, retail, restaurants and smaller banks for short targets.
Financing of many companies in these sectors are tied to private credit and they could be quietly rotting beneath the surface, Ganapathi said in an interview with Reuters.
Short-biased funds structured as hedge funds mainly profit when stock prices decline. Ganapathi declined to name specific short targets and the size of the fund, which she said will be launched later this month.
"AI is not the entire market, even though it appears to be," Ganapathi said. "For us, credit is the leading indicator and signal on how the market is going to be."
The fund is targeting a potential blind spot as private credit's opacity can mask financial strain on borrowers for years, as highlighted in the bankruptcies of US auto parts supplier First Brands, car dealer Tricolor and UK mortgage provider Market Financial Solutions.
"This time around, it is not going to be like 2008. It's going to be a lot worse," Ganapathi said.
US private credit default rate reached an all-time high of 6.3% in August on an annualized basis, according to Fitch Ratings.
TOUGH TERRAIN
Minerva is entering an unforgiving corner of the hedge fund industry. Dedicated short-biased funds have dwindled to just six as of the second quarter of 2026 from 54 in 2008, according to HFR industry estimates.
Much of it has been due to the increased regulatory scrutiny of short positions, a challenging performance environment for short exposures and changes in hedge fund reporting in the US.
The 2021 Gamestop frenzy underscored the risks of crowded short bets as a stock's move disconnected from fundamentals can quickly overwhelm a sound investment case.
Still, Ganapathi said Minerva could benefit from Burry's experience. His bets against the subprime mortgage market in 2008 were chronicled in "The Big Short".
Burry wound down his hedge fund, Scion Asset Management, late last year, and launched a paid Substack newsletter, "Cassandra Unchained", which he uses to publish his market views.
Ganapathi said someone close to Burry had first introduced them. She later reached out to Burry after he subscribed to her Substack newsletter, eventually asking him to join Minerva.
Ganapathi is also the founder of Unicus Research, a short-selling research firm. Some of its top bearish recommendations were on electric vehicle maker Faraday Futures and used-car retailer Carvana, according to its website.
(Reporting by Johann M Cherian and Niket Nishant in Bengaluru; Editing by Arun Koyyur)
