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Industry Updates

Hedgebay launches secondary hedge fund market index; inaugural index shows further fall in average discount on hedge fund shares

Monday, October 26, 2009
Opalesque Industry Updates - Hedgebay Trading Corporation (“Hedgebay”) has launched the first hedge fund secondary market index.

The Hedgebay Global Hedge Fund Secondary Market Index provides hedge fund investors with statistics on the key aspects of the secondary market. Most notably it offers the average discount or premium to Net Asset Value (“NAV”) of hedge fund shares traded during the month. In addition, the monthly index also includes the following features:

• The average discount or premium to NAV over one year and 10 years
• The highest and lowest individual prices of traded assets
• The top two strategies traded

The inaugural index has revealed another decrease in the average discount of hedge fund assets in September, the third consecutive month that the index has fallen. The fall, compared to stable markets and good hedge fund performance, has shown that hedge fund investors are still using the secondary markets to resolve discrepancies on their balance sheets, rather than generating liquidity. The need for such services has driven higher volume on the secondary markets, with the number of trades for the year up 15% on those for 2008.

As the first and largest secondary hedge fund market provider, Hedgebay - founded in 1999 - can rely on historical data dating back over a decade. Elias Tueta, co-founder of Hedgebay believes that the recent turbulence across the global financial sector and hedge funds in particular, has necessitated the creation of the industry’s first index. He believes that, as pioneers of the secondary market, Hedgebay alone has the experience to provide such a product:

“The financial crisis, and the subsequent evaporation of liquidity, has caused the demand for the secondary market to accelerate. The volume of trades now being done by buyers and sellers seeking liquidity has contributed to the secondary hedge fund market becoming an established industry. The secondary hedge fund market now has a much greater number of investors, and they demand more detailed information on how the market is functioning. The industry needs an index to cater to this growth, and as the market leader, we felt it was incumbent on us to provide it.”

The index primarily targets investors in hedge funds, such as fund of hedge funds, pension funds, endowments, foundations, insurance companies, family offices, wealth managers and HNWIs. However, Tueta believes that the index also provides pertinent information for the wider global investment and financial services industry, including leverage providers, regulators, investment banks and prime brokers.

The index is an essential barometer for the state of the hedge fund industry, by signposting fluctuations in investor sentiment and liquidity levels within the market. Strong historical correlations can be found between the average discount of trades on the secondary market and the future performance of the hedge fund industry. Tueta also feels that the index can be used as an early warning system for signs of tension or recovery within the hedge fund sector:

“The secondary market is a highly useful barometer for judging the current mood of hedge funds investors. The discounts at which investors are willing to trade at has proved to be indicative of the confidence, or lack thereof, that investors currently have in hedge funds. The widening or reducing of discounts can similarly be used to gauge the liquidity in the market. This is crucial information for all investors, not just those active in the secondary market. The aim of the index is to provide a clearer picture of the hedge fund industry for all those within it.

Recent research from Oxford University* – conducted using data from Hedgebay –supports this theory. The research revealed that the secondary market can be used as an indicator of the motivations behind investors’ decisions to enter and exit hedge funds.

Secondary market data for the year so far has shown the prevailing mood of pessimism within the industry. The average discount fell again toward the end of the third quarter of 2009, showing that confidence in hedge funds is still wavering among investors. However, a glimmer of optimism was revealed in August, as a trade took place at NAV, the first time in eight months that a hedge fund share has not been traded at a discount. Although it is premature to make predictions from an isolated trade at NAV, the general trend has shown that secondary market investors are increasingly willing to pay more for high pedigree managers investing in liquid assets.

For nearly a decade Hedgebay Trading Corporation has provided hedge funds with a market to trade positions by matching buyers with sellers. Since its launch, Hedgebay has provided secondary market data to registered users of its website (www.hedgebay.com).

Its primary service has sourced, executed and settled billions of dollars of secondary market transactions giving the company the most comprehensive insight to date into price discovery and the fair value of illiquid alternative investment assets.


* Research by Dr Tarun Ramadorai, Reader of Finance at the Said Business School, Oxford University, can be viewed here.


About Hedgebay Trading Corporation
Founded in 1999, the Nassau-based Hedgebay Trading Corporation 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.


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