Hedgebay Trading’s February index has revealed the first trade above NAV on the hedge fund secondary market in almost two years.
The premium trade, which took place at 102 per cent of the hedge fund share’s value, is the clearest indication yet that high quality hedge fund assets are once again becoming must-have commodities among investors, says Hedgebay.
The Hedgebay Secondary Market Index has also shown that the average trade price rose in February to 91.4 per cent, a level more commonly seen before the financial crisis struck.
This is the second consecutive month that the average price has risen, which Hedgebay feels is further encouragement for the hedge fund industry.
Elias Tueta, co-founder of Hedgebay, says: “February’s data is very good news for the hedge fund market, or at least for the part of the market that trades in liquid assets. The first premium trade in quite some time is a highly significant event for the industry. It shows that investors are not just confident about buying hedge fund assets; they are now willing to pay over NAV to secure the most sought after funds. The prices being paid for liquid assets are rising across the secondary market, and the average price of 91 per cent is not far off the sort of average we were seeing before the downturn.”
However, Tueta warns that no matter how encouraging the SMI results, they only tell half the story. The dispersion between the highest and lowest trades widened to 70 points, with the lowest trade occurring at 32 per cent of NAV. This has made the two-tiered market more pronounced, as investors continue to struggle to remove illiquid assets from their portfolios.
The February edition of the Illiquid Asset Index has shown a small rise in the average price for assets that have no contractual redemption rights to investors, such as “side-pockets” or for hedge funds that have suspended redemptions. The average price stands at 46.3 per cent of NAV, but substantial trading at this end of the market has moved Tueta to warn that the two tiered market will continue for the foreseeable future.
“The two-tiered phenomenon is here to stay for the time being, as a substantial number of funds still have illiquid assets in their portfolios. The two tiered market is being driven partly by the nature of the funds, but also by the type of investors. There is an essential difference between the outlook of investors trading in liquid assets and the outlook of those trading in illiquid ones, and what we are seeing at the moment is, in essence, two different markets – a liquid one and an illiquid one,” he says.
“The SMI is showing the confidence of investors who favour the short term strength of liquid assets, while the IAI is displaying the investors who have done large amounts of analysis on underlying holdings and have a long term plan for the more illiquid assets. The two different investor types rarely cross over from one type to the other as that would require a fundamental change in philosophy, which leads us to believe that the two tiered market will be around for quite some time to come.”