Secondary market peaks as investors take advantage of slowdown

Date: Thursday, September 30, 2010
Author: Emily Perryman, HedgeWeek

The traditional summer slowdown in August failed to materialise on the secondary hedge fund market, as Hedgebay registered its highest volume of trading for the year.

Despite the increased volume, the average price for assets on the secondary hedge fund market fell slightly for the third month running.

The average price for trades on Hedgebay’s Secondary Market Index stood at 74 per cent, continuing the marginal retreats of recent months.

With investors’ priorities focussed on portfolio clean up, the majority of trading once again took place within gated and suspended funds.

While the trading dynamics of recent months persisted, the amount of trading taking place was notable, given the time of year. August’s holiday season meant that global markets in general were quiet, and the highest level of secondary trading in 2010 suggests that many hedge fund investors took the opportunity to focus on their portfolio construction via secondary trading.

Elias Tueta, co-founder of Hedgebay, says: “The relative quiet in August allowed investors to refocus on cleaning their balance sheets, which in part explains the drop in average price from last month. With much of the trading taking place in gated and suspended funds, investors are currently focussed on making sure their portfolios are set for when markets resume in earnest.

“What the resumption of normal trading will bring is an intriguing question for the market. Primary performance has been just ok, and recent events such as the Greek crisis are still fresh in investors’ minds. If we see a sustained increase in hedge fund performance, and the subsequent demand for the best managers, then we will see funds being closed to new investment. In this instance, we may see average prices returning to pre-crisis levels. However, if we see another significant downturn, as many global macro managers have predicted, the immediate future for the industry could be quite different.”

Trading in Hedgebay’s Illiquid Asset Index, which focuses on hedge fund assets that have suspended redemptions, gave an insight into this possibility. The IAI fell sharply to 44 per cent in August, a drop of over 23 points from July. Transactions were spread between emerging market real estate, private equity and credit related assets. The price drop indicates that investors in illiquid assets continue to be wary of market conditions. Moreover, another downturn may push trading further toward the bottom end of the market.

Tueta says: “It is not certain at this stage whether trading patterns in these illiquid assets are being driven by investors’ fears or by other random market factors such as distribution. It will be interesting to see how this section of investors reacts to the next set of market developments, especially if the hedge fund market dips again.”