Hedge Fund Secondary Market Hits New Low

Jan 28 2010 | 2:18pm ET

The law of supply and demand is killing the secondary hedge fund market.

Prices paid for hedge funds on the secondary market fell to an all-time low in December, with sellers getting less than 80 cents on the dollar, according to Hedgebay Trading Corp., the largest secondary hedge fund market provider. The firm said that investors seeking to dump illiquid assets were responsible for the decline; in November, buyers were paying more than 86% of net asset value on the secondary market.

“The choice that investors face when they find themselves with unwanted illiquid assets is slow bleed vs cut your losses and move on,” Hedgebay co-founder Elias Tueta said. “The kinds of illiquid assets that most hedge fund investors find themselves holding today are very long term in nature.  Last year's credit and equity market rallies allowed hedge fund managers to sell a fair amount of assets and return capital.  What wasn't sold last year could be with us for quite some time. Since these assets are illiquid, managers do not frequently change their pricing and as a result they are ‘non-performing’ in an investor's portfolio.  This dead weight makes achieving performance targets very difficult."

Prices on the Hedgebay Global Hedge Fund Secondary Market Index—which had remained near or above NAV since its inception in 1999—plummeted in the summer of 2008. After a brief recovery in mid-2009, when prices topped 90% of NAV, the index again tumbled, sinking below 80% for the first time. In December, not a single trade was completed at or above NAV; the closest was 97%. The lowest trade went for just 56% of NAV.

The most-traded strategy in December was credit, followed by private equity.


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