Portfolio Diversification Beyond Stocks and Bonds: The Value of Private Credit

In this blog, we look at:

• Why Portfolio Diversification Matters?
• How We Measure Diversification
• The Data: Private Credit is Uncorrelated with Other Assets
• A Step Further: Diversification Within Private Credit
• Example: A Tale of Two Private Credit Investors

Why Portfolio Diversification Matters?

When you combine investments that don’t move in sync with each other, you can help reduce overall portfolio volatility and potentially deliver steadier returns.

Let’s break this down:

• Lower Volatility: Not all assets react the same way to market events. When you combine assets in a portfolio that move in different directions, your highs and lows may not be as extreme which can mitigate the risk of large, sudden losses.
• Steadier Returns: Spreading investments across different asset types that behave differently (with lower correlation to each other) can smooth out returns, potentially delivering steadier performance. 

Lower volatility and steady returns can be especially important for income-seeking investors who are looking to generate cash from their portfolio while protecting their initial investment.

How We Measure Diversification

To understand if a portfolio is truly diversified, we can look at correlation, which shows how closely two investments move together.

• A correlation of 1 means they move in the same direction—when one goes up (or down), so does the other.
• A correlation of -1 means they move in opposite directions—when one goes up, the other goes down (and vice versa).

When building a diversified portfolio, you want to combine uncorrelated assets.

The Data: Private Credit is Uncorrelated with Other Assets

Our team analyzed the funds on the Heron platform compared to other common asset classes. Specifically, we calculated the correlation of the monthly returns from January 2022 to December 2024.*

Source: Correlation analysis time period is January 2022 to December 2024. See footnote for details.*

We found that the aggregated funds in the Heron portfolio were the least correlated asset when comparing within the group. This shows how the private credit funds on Heron move independently from public markets and provide "true diversification” to a portfolio of traditional stocks and bonds.

A Step Further: Diversification Within Private Credit

As we saw in the data above, adding private credit exposure to your broader portfolio creates true diversification due to its uncorrelated nature to other sectors. But we need to take diversification one step further to realize its full potential.

To reduce risk of losses, it’s crucial to look at your diversification within the private credit asset class.

Investors should spread their exposure across high-quality assets, combining:

• Loans: Diversification comes from investing in hundreds or thousands of loans, not a single placement or handful of loans.
• Sectors and market segments: Investing in multiple sectors across market segments (a mix of companies with annual revenues between $10 million and $1 billion) provides diversification benefits as economic cycles play their course. For example, during economic expansion, businesses in cyclical sectors benefit from increased consumer spending and investment. This can lead to higher revenues and profits for companies in sectors like consumer discretionary (retail, entertainment), industrials (manufacturing, construction), and technology. On the other hand, defensive sectors, such as consumer staples (e.g., food, beverages, household goods), utilities (e.g., electricity, water), and healthcare, tend to hold up better during recessions.
• Fund managers: Credit managers may specialize in different strategies, and combining multiple managers can reduce reliance on a single approach.

Private Credit: A Spectrum of Diversification

When considering investment options, we can look at private credit diversification as a spectrum.

On one end of the spectrum, an investor can gain exposure to a single private credit loan, while on the other end an investor can gain exposure to a portfolio of thousands of loans from multiple fund managers.

By increasing diversification across loans, sectors, and fund managers, investors reduce their concentration risk. 

Example: A Tale of Two Private Credit Investors

Consider the following example where two investors each allocate $100,000 to private credit:

Investor A: Undiversified

• Platform: Digital private credit deal platform
• Investment: Splits up $100,000 into two single junior loans with $50,000 in each deal
• Historical Loss Rate: Platform deals have a historical loss rate of 2.15%**

Investor B: True Diversification

• Platform: Heron Finance
• Investment: $100,000 into a portfolio with 3,700 senior secured first lien loans, 11 GICS sectors, and 12 fund managers
• Historical Loss Rate: Funds on Heron have less than a 1% historical loss rate

We can see in the example above that both investors have private credit exposure, but Investor A has taken on greater concentration risk with exposure to only 2 loans, both of which are junior loans, which increases the investor’s potential to experience a loss compared to a senior secured loan. Heron Finance’s portfolio has reduced Investor B’s concentration risk, which is a significant factor towards limiting loan losses.

Heron portfolios aim to deliver consistent income

Private credit can deliver consistent returns in volatile markets. Diversify your investment strategy with a Heron portfolio.

Heron portfolios are designed to deliver:

• Higher returns than bonds
• Lower volatility than stocks
• Consistent monthly income

Chart: Heron vs Other Asset Classes* 

*Chart sources: Correlation, volatility, and return analysis is for the three-year time period of January 2022 to December 2024. The time period was selected based on the inception dates of underlying funds on Heron. Performance is based on backtested data and is hypothetical and does not represent actual performance of Heron clients. There is no representation being made that an individual investor will achieve future correlations, volatility, or returns similar to those shown. ETFs used for asset class representation were selected based on their total assets under management and typical trading volume and include: iShares iBoxx $ High Yield Corporate Bond ETF (HYG), Vanguard Real Estate Index Fund ETF Shares (VNQ), Invesco Senior Loan ETF (BKLN), Vanguard S&P 500 ETF (VOO). Private credit funds on Heron include all funds available on the Heron platform as of April 2025. All ETFs and private credit fund returns assume dividends are reinvested, as applicable. The volatility of the ETFs or the funds available on Heron may be materially different from the individual performance attained by a specific investor. In addition, an individual investor's portfolio holdings may differ significantly from the securities that comprise the ETFs and funds used for illustration of asset classes. The ETFs and funds available on Heron have not been selected to represent an appropriate benchmark to compare an investor's performance, but rather are used to allow for comparison of a hypothetical investor's performance in a certain asset class relative to Heron. Volatility is represented by standard deviation of returns, a statistical measure that represents the amount of variation of a set of data points around its mean (average). Higher standard deviation represents higher volatility.

**Platform deals loss rate of 2.15% references Percent as of 6/17/25: https://percent.com/our-track-record-of-performance/