Secondary Market For Hedge, Private Equity Funds Poised For Growth

Aug 15 2012 | 11:16am ET

The secondary market for hedge funds, funds of hedge funds and private equity funds—now worth an estimated $65 billion—is poised to more than double within the next year, according to a recent survey.

Financial software specialist Simplify polled 489 institutional investors managing gross assets of $417 billion and they predict growth to $146 billion—growth it considers a positive thing.

“The growth of the secondary market can only help hedge funds and private equity firms as they struggle to raise capital,” says CEO Brian Shapiro. “Cash is king, and investors will be more eager to allocate if they know they aren’t checking into the Hotel California.”

Although best known as a source of liquidity for investors stuck in side pockets and suspended hedge funds, the secondary market can also be a place to pick up shares in funds with excellent performance. In the first quarter, the secondary market Hedgebay was shopping a $5 million interest in Elliott International, expected to carry a starting discount of between 15 and 25%. The seller was reportedly a European fund of funds facing redemptions.

Currently, Hedgebay has buyers for shares in hedge funds like Appaloosa Management, Brevan Howard Asset Management and BlueCrest Capital Management, while London-based secondary market Cattegatt Capital lists D.E. Shaw Group among the shares for which there is currently demand.

Simplify found that completing secondary market transactions can be time consuming, however; 55% of respondents who had traded a private placement interest at least once reported an average completion time of over 90 days. To Simplify, this indicates the process is “clearly still encumbered by prehistoric execution and settlement workflow.”

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