Secondary market pricing service for hedge funds launched

Secondary market hedge fund provider Hedgebay Trading has launched a valuation service for hedge fund positions.

The service provides an indication of the price range for a hedge fund. According to Elias Tueta, co-founder, more fund of funds and institutional investors are using the service to offload positions in hedge funds or to take advantage of the discounted prices of most funds at present. Tueta said most funds are now trading at a discount of 20% of net asset value (NAV).

This is in stark contrast to the secondary market that only two years ago was trading at NAV plus 10% or more for many funds.

Tueta said the new service complements the secondary market Hedgebay operates. Although no exact figures are available, it is thought the secondary market run by Hedgebay has a turnover worth billions in 2008. Tueta confirmed the volume of trading had doubled between 2007 and 2008. Although he does not expect 2009 to doubt the turnover of 2008, he confirmed that volume for January 2009 compared with a year ago was substantially higher.

In 2008 just over three quarters of trades on the secondary market run by Hedgebay were conducted by funds of funds. Pension funds and endowments accounted for 13% of trade volume, an increase of 4% over historical levels. Family offices and banks more than halved their use of the secondary market in percentage terms in 2008, according to figures from Hedgebay. Tueta said the figures do not necessarily reflect the size of the deals by trading type. However, the percentage of trades completed at a discount jumped from 57% in 2007 to 70% in 2008. This trend is expected to continue.

The pricing service provides users with valuations of discounts or premiums to hedge fund positions, including funds in lock-up, with long redemption periods, side pockets, raised gates, suspended redemption rights or are proposing or in some form of restructuring.

The indicative price subscribers receive is the discount or premium levels to published NAV.

Factors that influence the discount or premiums include market risk; strategy risk; manager risk, including likelihood of future gating or suspension of the fund, style drift and liquidity pressure.

Hedgebay has been providing provided hedge funds with a market to trade positions by matching buyers with sellers since 1999.

Its primary service has sourced, executed and settled billions of dollars of secondary market transactions.

Hedgebay matches sophisticated buyers and sellers of hedge fund interests and other illiquid alternative investment assets. Its international client base includes funds of hedge funds, ultra high net worth family offices, banks, pension funds, insurance companies, endowments, foundations and sovereign wealth funds.

Participants in the secondary market look to capitalise on liquidity and access to highly sought-after fund managers. Hedgebay allows sellers to capture the opportunity cost of redeeming and exit positions before the end of the lock-up period, giving them the ability to reduce or eliminate tail-risk events. Buyers benefit from being able to add to existing positions at discount, profit from high water marks, acquire "seasoned" shares (reduced or even no lock-up) and increase exposure to top tier managers.

"Since there is relatively little homogeneity across hedge funds, the market to sell them is more like the market for houses, which are ultimately only worth what someone is willing to pay for them. We expect the use of this new service to become standard business practice for buyers of hedge fund positions and enhance the matching of buyers and sellers," said Tueta.