Hedge Fund Secondary Market Rebounds From May’s Low

Jul 28 2010 | 8:59am ET

The average price for assets on the secondary hedge fund market rose to 78% after shaking off some of the fallout from May’s European debt crisis, according to Hedgebay’s June Index.

Investors’ confidence was shaken by the damage caused by the Greek crisis, and saw the average price for hedge fund shares drop to an all time low. According to Hedgebay—a secondary marketplace for hedge funds—the average price shows that secondary users continue to be wary of paying too much for assets, but the rise does indicate an upturn in confidence.

The 8% rise in the average price has been helped by trading in the ‘near-par zone’— trades which take place at just below the net asset value of each share.

“The near-per zone was typically used by investors in locked up funds to raise short term capital or reduce the market risk in their portfolios," says Elias Tueta, co-founder of Hedgebay. "When the crisis first arrived, the ability of managers to raise any capital disappeared, and there are virtually no locked up funds around. This, and the fact that investors generally have much greater concerns than liquidity or tactical trading, has made near par trading virtually non-existent.”

According to Tueta, there has been a major shift in the reasons why managers and investors utilize the secondary market.

“Where once the main use of the market was to access high quality, locked up funds, investors are now concerned with mitigating the damage within their portfolios,” says Tueta.

While Tueta believes that near par trading is an interesting development, it is not yet conclusive evidence of what is to come on the secondary market. The return of near par trading in earnest will be the clearest indication that trading patterns on the secondary market have returned to pre-crisis conditions—and that the hedge fund market has finally and fully recovered.

“The volume of near par trading is a good barometer of the health of the hedge fund industry. The performance of hedge funds in the primary market will give us a good idea of what we can expect in that regard. The success of capital raising among managers will depend on them sustaining the solid performance we have lately seen in the industry. If this continues, we may eventually see more managers closing to new investors or offering share classes with longer lock-ups, and then we may see the de facto return of near par trading," says Tueta.


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