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Escape the hedges


Date: Wednesday, August 15, 2012
Author: Michelle Celarier, New York Post

Investors have figured out another way to dump their hedge funds: sell their partnership interests on the secondary market.

Even such big names as SAC Capital Advisors and Elliott Management are on the block as investors clamor to unlock their investment capital.

The secondary market has exploded — doubling over the past year, said Brian Shapiro, the founder of Simplify, a firm that tracks the business. Last year, secondary market listings in hedge funds, funds of funds, and private-equity funds hit $65 billion in notional volume.

Such secondary trading started to take off in 2008 when several hedge funds refused to let investors take their money out, and Shapiro expects further growth of 125 percent this year.

“There’s a lot of unpredictability in the markets now,” he said, which is leading institutional investors to engage in what he calls “opportunistic selling.”

Poor hedge-fund performance is a main driver of the sales. Hedge funds gained a median 3.27 percent this year through July, according to the Absolute Return Composite Index. That compares with 9.68 percent for S&P 500 equities.

Stakes in some of the industry’s biggest names are selling at sizable discounts to the value of the investor’s interest — though the numbers have improved since the panic in early 2009. Three years ago, the average bid was a discount of 83.9 cents on the dollar. but by this June the average bid discount had improved to 53 cents, according to Simplify’s survey of several brokers.

By July, Cattegatt Secondaries, a specialist broker, said buyers were still looking for a discount on funds run by well-known managers.

* Steven Cohen’s SAC was fetching discount bids of mid-40 cents on the dollar.

* Stephen Feinberg’s Cerberus Capital funds are drawing investor attention at a discount in the low 20 percent range.

* Marc Lasry’s Avenue Capital’s Asia or Europe funds have buyers kicking the tires at a discount of 40 cents to 45 cents on the dollar.

* Paul Singer’s Elliott International was being sold by one European fund of funds that was suffering redemptions earlier this year with bids of 75 cents on the dollar, according to Shapiro. Elliott gained more than 4 percent for the year through July.

However, there are funds trading at a premium. Gottex, a fund of funds engaged in the market, reported that investors are willing to pay a premium for DE Shaw’s Oculus fund and David Einhorn’s Greenlight Capital.

Secondary market sales of hedge fund limited partnership interests are privately negotiated and often take months to complete.

Top players brokering the sales are The Parkhill Group, a Blackstone subsidiary with an annual volume of about $10 billion, and Cogent, with $1 billion.