Volatile trading on hedge fund market likely to extend in 2011

Date: Thursday, December 23, 2010
Author: Emily Perryman, HedgeWeek

Prices on the hedge fund secondary market remain volatile, according to the latest data from Hedgebay. 

A lack of price stability has been the recurring theme of 2010, evidenced once again when the average trade price dropped to 74 per cent in November after registering the highest average in six months during October.
 
October’s high of 81 per cent was the third time in a row the index had risen, suggesting that consistency might slowly be returning to the market after a turbulent year. However, the drop shown in November has cast doubts over that theory, with the volatility now expected to extend into 2011.
 
The Hedgebay Index has been inhibited by a distinct absence of funds trading near par over the last year, suggesting a continued lack of confidence in the market. A relative lack of pricing transparency has also created uncertainty in the market, although Hedgebay believes that its newly launched Pricing and Valuation Consultancy Service will help to bring greater insight to this area.
 
Elias Tueta, co-founder of Hedgebay, says: “In many ways, this month’s results have been typical of 2010. After an unsettled year of trading on the secondary market, the general sentiment amongst investors is one of caution. This has created an artificial ‘cap’ on the price they are willing to pay, and the fluctuations in the index have reflected that. Every time the price looks as though it is rising consistently, we saw a fall in the index. There is currently little to suggest that that will change in the early part of 2011.”
 
Tueta has also pointed to the recent governmental interventions at several large hedge funds as a reason for November’s drop. The interventions have made investors anxious that their managers, or managers on offer on the secondary market, could face the same treatment. 
 
Meanwhile, Hedgebay’s Illiquid Asset Index which measures trading in gated or suspended funds rose quite significantly to 44.09 per cent. Notably, the majority of transactions in November took place in this part of the market. Hedgebay believes that the surge of trading in these illiquid assets shows a renewed determination among investors to clean their portfolios. Two years on from the credit crisis, the ongoing cost of servicing illiquid assets has proved to be a drain on investor capital, making the disposal of such assets a necessity.
 
Tueta says: “There is something approaching fatigue in the illiquid end of the secondary market, as investors try to start anew in 2011. A clean portfolio free from illiquid assets will allow investors a clean bill of health going into the first quarter of next year, and free up capital for some of the funds that have shown good performance this year. This pattern of trading will likely continue throughout December.”