The November edition of Hedgebay Trading’s monthly index has posited that if 2010 is to see the hedge fund market return to its previous performance levels, then the reduction of underperforming, illiquid assets must be hedge fund investors’ primary concern.
The Hedgebay Global Hedge Fund Secondary Market Index last month showed the continuance of a wide dispersion between the highest and lowest prices at which secondary market users were willing to trade at, further supporting evidence that a two-tiered market is developing.
The November index, which revealed that the gap between highest and lowest trades has widened even further, seems to have confirmed this theory.
The lowest trade in November occurred at just 29 per cent of net asset value, a fall of more than 27 per cent from October’s low. While the majority of trades for the month took place closer to the average of 86 per cent of NAV, Elias Tueta, co-founder of Hedgebay, believes that the market could stay this way for some time:
“The highest trade in November took place at 97 per cent. With an average trade price of 86 per cent for the index it’s clear that buyers in this market believe at least two things. First, it will take some time for hedge funds with illiquid assets to work through the illiquidity they are experiencing and second, that there isn’t 100 per cent confidence that the price at which portfolios are market today will be fully realised.
“When you look further at the range of trade prices, you can see down at the lower end that investors have even less confidence about these factors and as a result are pricing these securities with substantially higher discounts. It is this latter phenomenon that is creating the two-tiered market, and while these illiquid assets remain on hedge funds’ balance sheets, the market will remain this way.”
Hedgebay believes that the current reality of the hedge fund market leaves investors with an important decision to make as the end of the year approaches and the New Year begins. They can either dispose of any illiquid assets, leaving them with clean balance sheets at the start of 2010, or they can try to protect whatever gains have been made this year and hope for the best next year. Hedgebay feels that investor’s management of this dilemma will play a crucial role in determining winners and losers in 2010.
“The second half of 2009 has shown encouraging signs for the hedge fund primary market, and there are many hoping that 2010 will bring back the glory days of the hedge fund industry,” says Tueta.
Rolling the dice (also known as doing nothing) has had mixed results in 2009, but generally speaking, many hedge fund investors that have been gated or suspended have been bailed out by perplexingly strong credit and equity markets: “However, the secondary market is the true acid test of investor sentiment, and we should be aware that it is investors’ handling of the illiquidity at the bottom of the market, rather than of the top performing liquid funds, that will dictate more when the market fully recovers.”
