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Lindsey Clavel,  Managing Director for Europe, Hedgebay

Illiquidity still a major factor on secondary market trading, says Hedgebay

Continued illiquidity and a shift in the price of underlying assets in the secondary hedge fund market has caused fluctuating trading levels in the last few months, Hedgebay has claimed. Secondary market trading data from July to September has shown that despite a steady rise in the average price in Q3, volatility is still to be expected.

The average discount to NAV on transactions completed in the third quarter of 2011 has climbed steadily from around 70% in July to 85% in September. However previous pricing levels, notably June’s average price of 82%, indicate that the market is still largely in a state of fluctuation. This suggests that investors have yet to find a consistent level of pricing compared to the value of their assets.
The summer months’ trading also showed that transactions are reflecting a fundamental shift in the prices of underlying assets, a theme that has characterised the secondary market since 2008. With shifting values commonplace, and true price discovery still elusive, many investors continuing to hold their assets rather than trading.
The uncertainty among investors that these factors have caused continues to keep the average price of completed transactions at around the three quarter to NAV mark - with the long awaited market recovery still seemingly some way off.
Lindsey Clavel, Hedgebay’s Managing Director for Europe, says: ‘The fluctuating pricing suggests that the market is still unsure of exactly where it stands between crisis and recovery. The overall pattern of trading is still being dictated by the legacy effects of the downturn, with the amount of illiquid assets, liquidity demands and portfolio construction all playing a part. It is currently very difficult for buyers or sellers to determine a true and fair valuation for assets, with much of the pricing dependent on the requirements of the individuals involved. I believe this is why we are seeing such volatile pricing.”
While uncertainty is still the chief sentiment among investors, Hedgebay has pointed to an increasing interest in near par trades, where prices come close to the NAV valuation of assets, as a positive signal that investors are willing to explore the kind of prices that characterised the market before the downturn.
“While not conclusive at this stage, the willingness of both the buy and sell sides to offer prices at near or even par is an encouraging sign," says Clavel. "The amount of completed transactions at this level remains relatively low, but so long as the willingness on both sides remains we would expect to see these trades come to fruition more and more. That will aid a market recovery, but ultimately trading will remain uncertain until the market has resolved its illiquidity issues.”
Hedgebay’s Illiquid Asset Index showed even more volatile summer trading than its sister index. The average price paid for assets in “side-pockets” or for hedge funds that have suspended redemptions registered at 56% and 26% and 32% for July, August and September respectively. This translates to a month-by-month percentage change of -52% and 26% over the third quarter, proof positive of the volatile pricing differences in the illiquid portion of the index.

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