The October edition of Hedgebay Trading’s monthly index has shown that the purchase of hedge fund assets is being driven by two prevailing sentiments among investors, creating a two-tier hedge fund market.
The Hedgebay Global Hedge Fund Secondary Market Index reveals a wide discrepancy between the highest and lowest prices at which secondary market users were willing to trade at.
The highest trade took place at NAV, the second time in the last three months that this watermark has been reached. This is symptomatic of confidence returning to some sections of the industry.
However, the number of trades occurring at the lower end of the scale, the lowest of which took place at only 40 per cent of NAV, shows that the search for liquidity and the cleaning-up of unwanted positions is still taking place:
Elias Tueta, co-founder of Hedgebay, commented: “The trade at 100 per cent of NAV shows that investors are increasingly willing to pay top dollar for high quality and hard to come by funds. More and more we will see trades reaching, and maybe even exceeding, NAV as investors increasingly put their faith in these high end assets. However, in the other extreme, the trade at 40 per cent of NAV, and the volume of trades at a similar level, still shows that riskier, less liquid assets –notably side-pockets -are increasingly overvalued. Sellers currently still have to offload these kinds of assets at whatever price they can get.”
Though the disparity in the valuation of assets suggests a continuing lack of conviction among hedge fund investors, the index also provides signs of encouragement for the industry. The average price (in terms of per cent of NAV) rose to 87 per cent – the first time in five months that the average price of assets being traded has risen. While the rise in the average price is a reason for optimism, Hedgebay has indicated that hedge funds’ portfolios have not yet been fully cleaned-up.
“During a month of heavy trading volume, the average price is up almost 400 basis points from September. This, perhaps even more than the trade at 100 per cent of NAV, is a sign of increasing optimism, but it is not yet conclusive. When we start to see a substantial amount of trades being done at around the 95 per cent level, then we might begin to say that the hedge fund market is almost back to normal,” says Tueta.
