Scott Goodwin’s Diameter Bets Big On AI Debt In These Companies, But Warns ChatGPT Is At Risk: Q4 Letter

Diameter Capital’s Master Fund gained 0.3% net for the fourth quarter, bringing its year-to-date return to 8%. The long-only Diameter Dislocation Fund III Base was up 5% for Q4, returning 9% since inception.

Meanwhile, the S&P 500 returned 2.6% for the fourth quarter and 17.8% for all of 2025, while the High Yield Index gained 0.7% for the quarter and 7.8% for the year. The Investment Grade Index returned 0.8% for Q4 and 7.8% for 2025. Investment-grade and high-yield spreads widening 3 basis points and 1 basis point, respectively.

In their fourth-quarter letter to investors, which was obtained by Hedge Fund Alpha, Scott Goodwin and Jonathan Lewinsohn said the unsatisfactory performance of their two funds during Q4 was largely due to First Brands and Eye Care Partners. DDF II and DDF I are both in harvest, having returned 10% and 110% of paid-in capital, respectively.

Also see: 2024 Sohn New York Conference: Scott Goodwin of Diameter Capital Likes This Distressed Bank

“SuperDuperMicrocycle”

Diameter Capital participated in artificial-intelligence  bets which he coins "SuperDuperMicrocycle" during the fourth quarter by making a sizable investment in Beignet Investor LLC’s debt.  Goodwin coined that phrase to characterize a a long-lasting investment cycle that could potentially "outlasting many investing careers" and refers to opportunities beyond just betting on AI chips or other direct AI bets.

Beignet is a special entity vehicle created by Meta Platforms and Blue Owl Capital to finance data centers.

Goodwin and Lewinsohn reported that Meta decided to finance an AI data center in Louisiana, but didn’t want to lever its “pristine” balance sheet. Investors called for a corporate backstop, and this compromise was formed. Under the terms of this compromise’s structure, Meta will have to make whole the $27 billion worth of bonds if it ever dumps the project.

Also see: Tiger Global Makes Just Nine New Investments In 2025; Big Gains On ChatGPT And Waymo

In exchange for the complexity and illiquidity of the structure, Meta offered a spread of around 150 basis points from its equivalent-duration bonds. The Diameter team said they were the only hedge fund with a sizable allocation due to their relationships with the bank, the largest mutual fund lender, and Meta’s AI team. They also said those bonds rose 8 bond points on issuance, and they continue to hold a large position in the debt, which they believe provides not only attractive absolute value but also nice relative value.