Secondary Hedge Fund Market Still Facing Liquidity Issues

Oct 27 2011 | 10:20am ET

Trading on the secondary hedge fund market has fluctuated in the past few months, reports Hedgebay, blaming continued illiquidity and a shift in the price of underlying assets.

Secondary market trading data from July to September has shown that despite a steady rise in the average price in Q3, volatility is still to be expected.

According to Hedgebay stats, the average discount to NAV on transactions completed in the third quarter of 2011 climbed steadily from around 70% in July to 85% in September. Pricing levels, on the other hand—notably June’s average price of 82%—indicate the mmarket is still largely in a state of flux, suggesting investors “have yet to find a consistent level of pricing compared to the value of their assets.”

This past summer’s trading also showed that transactions are reflecting a fundamental shift in the prices of underlying assets, a theme Hedgebay says has characterized the secondary market since 2008, as many investors hold their assets rather than trading.

Investor uncertainty will probably keep the average price of completed transactions at around the three quarter to NAV mark, says Hedgebay, with the long-awaited market recovery still seemingly some way off.

Said Lindsey Clavel, Hedgebay managing director for Europe:

“The fluctuating pricing suggests that the market is still unsure of exactly where it stands between crisis and recovery. The overall pattern of trading is still being dictated by the legacy effects of the downturn, with the amount of illiquid assets, liquidity demands and portfolio construction all playing a part. It is currently very difficult for buyers or sellers to determine a true and fair valuation for assets, with much of the pricing dependent on the requirements of the individuals involved. I believe this is why we are seeing such volatile pricing.”

Despite the continuing uncertainty, Hedgebay sees the increasing interest in near-par trades, where prices come close to the NAV valuation of assets, as a sign investors are willing to explore the kind of prices that characterized the market before the downturn.

“While not conclusive at this stage, the willingness of both the buy and sell sides to offer prices at near or even par is an encouraging sign,” said Clavel. “The amount of completed transactions at this level remains relatively low, but so long as the willingness on both sides remains we would expect to see these trades come to fruition more and more. That will aid a market recovery, but ultimately trading will remain uncertain until the market has resolved its illiquidity issues.”

Hedgebay’s Illiquid Asset Index showed even more volatile summer trading than its sister index. The average price paid for assets in “side-pockets” or for hedge funds that have suspended redemptions registered at 56% and 26% and 32% for July, August and September, respectively. This translates to a month-by-month percentage drop 52% and 26% over the third quarter.


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