Discounted hedge fund trading increases

Despite a 20% year over year increase in trading of hedge fund assets through March 31, not one trade occurred at or above net asset value (NAV), according to figures from secondary hedge fund market provider Hedgebay Trading.

This means all trades occurred at a discount to NAV. This compares with over 92% of trades occurring at NAV or higher in 2003, a massive decline over five years.

Negative market sentiment and the need for liquidity have seen the pricing of hedge fund shares plummet over the past six months," commented Elias Tueta, co-founder of Hedgebay.

Tueta said the issue in terms of demand is the lack of conviction investors have about the state of the markets. This phenomenon can be broken down into two categories: performance and risk.

He said investors are trying to sort out which strategies will succeed in the short to medium term and to anticipate any liabilities in the form of further redemptions or possible capital calls from private equity commitments. "Given the current level of volatility, these are incredibly difficult calls to make," said Tueta.

He said the result of this could be that investors who have cash and the willingness to take risk will need to be highly compensated for doing so. Investors who are allocating to hedge funds are migrating to liquid strategies rather than illiquid, which is putting even more pressure on pricing at the less liquid end of the spectrum.

Despite the general negative sentiment in the investment universe, Tueta said capitulation selling has not yet occurred. He does not believe a bottom has been put in on the markets or for prices of shares in the hedge fund secondary market.

"There will be a new low at some point in the future," he said. "A bounce in the market, like the one we experienced in March, might be a golden opportunity to monetise positions. Investors who share this expectation should have limited sensitivity to pricing, Nassau-based Hedgebay and its authorised agents match 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 generally look to capitalise on two major themes: liquidity and access to highly sought-after fund managers. Hedgebay's services allow 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 can 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.