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Consistency shows signs of returning as secondary market hits six month high

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The highest average trade price in six months may signal the return of stability to the secondary hedge fund market, according to the October edition of the Hedgebay index.



October’s average of 81 per cent is the second consecutive monthly rise shown by the index, after averages of 74 per cent and 78 per cent in August and September respectively.

Though still some way off the year-to-date peak of 91 per cent, October’s figures show that the hedge fund market is moving steadily in the right direction.

The last six months have been characterised by volatile trading patterns, and Hedgebay believes that some consistency in trading will be welcomed by hedge fund investors.

Elias Tueta, co-founder of Hedgebay, says: “The patterns we see in secondary market trading are so often based on investor sentiment. It is extremely difficult for investors to be secure about committing to trades when price valuation is so volatile, as it has been over the last six months. The steady rises over the last couple of months may bring a bit of added confidence to investors for the rest of the year.”

However, Tueta warns that price volatility will continue to occur as along as correct valuation of assets remains a problem for secondary market users. Many investors have admitted that they have no mechanism for discovering a fair trading price as they have no insight into underlying value. This has seen many investors choosing to hold their assets rather than trading, which has limited the extent of the recovery the market has been able to make.

Hedgebay believes that for the market to reach a stage of full recovery, managers will need to provide greater transparency into the value of the underlying assets.

“At this stage, trading is being determined to too great a degree by forces external to the actual price of assets,” says Tueta. “Liquidity demands, portfolio construction and other legacy issues have all played a role in the price that trades are being made at. These factors are all dependent on the individuals trading, rather than the basic statistics of valuation, and this is why we have seen such drastic price changes of late. Investors are still too limited by a lack of firm valuation to predict whether recent price rises could be a lasting condition. Until a means of fair valuation has been established in the market, uncertainty will remain.”

Trading on the SMI continued its recent pace, with brisk volume recorded throughout the month. With trading once again taking place across the full range of asset classes, the indications are that investors are managing their portfolio positions as the end of the year approaches.

In contrast to the SMI, Hedgebay’s Illiquid Asset Index, which measures trading in gated or suspended funds, recorded a considerable drop to 34.50 per cent. After the notable stability of recent months’ trading, this month’s price difference suggests that the presence of leverage has had a negative effect on trading this month and that the market is not as stable as originally thought.

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