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Illiquid trading dominates as secondary market awaits locked up funds

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Hedgebay’s monthly secondary market index continued its general trend of recent months with near-par trading, deals at around 100 per cent of NAV, once again in short supply.

This trend is being driven by the scarcity of locked up funds on the secondary market since the credit crisis hit.

The unwillingness of managers to close funds to new investment means that much of the activity on the secondary market has been by investors exiting positions in suspended funds, rather than investors trying to access high performing funds.

Trading therefore continues to centre around shares in gated or suspended funds, as represented by Hedgebay Illiquid Asset Index. Average trading on the IAI rose to 67 per cent in July, the highest average recorded in nearly a year.

Elias Tueta, co-founder of Hedgebay, says: “Funds that are closed to new investment are still an extreme rarity at present. We will eventually see funds close to new investors if good performance on the primary market continues, and when we do, we will see the secondary market once again being used for its original intention – to allow hedge fund investors to access high performing funds that have closed to investors. Currently, secondary market users are focussed on risk mitigation and capital raising, and this has kept the average price at a relatively low level.”

Tueta believes that whether we see the reappearance of closed funds in the next few months will not only interest users of the secondary market, but have wider implications for the hedge fund industry as a whole:

“We are currently at an important juncture for the market. In the last few months we have seen inflows and performance in the hedge fund industry suggest that investors have confidence in hedge funds once again. However, we have also seen crises in global markets, the Greek debt crisis being a prime example, which hedge funds have not been immune to. If performance can exceed interest rates and equity returns over the coming months then we will see demand for hedge funds grow, and this will make the re-emergence of locked up funds distinctly possible. However, if markets suffer another downturn, we may see the cycle begin again, as investors try to recover their money. It will certainly be interesting to see which way the market goes.”

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