Opalesque Industry Update – Illiquid Index falls for the first time in five months as managers make distributions. |
The average price for assets on the secondary hedge fund market has risen again to 91% of NAV, according to Hedgebay’s April index, continuing the volatile trend seen since the start of the year.
The last year of trading on Hedgebay has been characterised by fluctuating average prices, with successive price rises seen only twice since May last year. As the market slowly recovers, investors have divided their priorities between buying sought after assets and clearing unwanted assets from their portfolio. This trading, occurring at the top and bottom of the secondary market, has created a wide dispersion that continues to dominate the market.
With the highest and lowest trades occurring at 102% and 33% respectively, April’s dispersion of 69 points represents one of the widest on record, and suggests that the two tiered market created by this activity shows no signs of abating. However, Hedgebay has indicated that a positive pattern may be emerging from the vacillations in price.
Elias Tueta, co-Founder of Hedgebay, said:
“There is great deal of complexity in the patterns that we have been seeing on the secondary market, and as ever, it is difficult to draw a single conclusion from such a diverse set of results. However, what have seen since January is price rises in January, February and April, with a fall in March. It suggests that a full recovery at the top end of the market is only being held up by the need to meet redemption deadlines at the end of each quarter, as investors are forced to accept lower bids to meet their cash requirements.”
“Despite the fluctuations, the average price has held at around the 85-90% mark this year, and without the anchor of quarterly redemptions these could be even higher. It is indicative of a market that has confidence in a recovery, without yet having the market dynamics to achieve it.”
At the bottom end of the market, the Illiquid Asset Index (“IAI”), which displays the average price for assets in hedge funds that have suspended redemption rights, fell for the first time in five months. The average price had steadily risen since November, but a number of distributions by managers has seen the average fall to 43%. Managers attempting to clean up their portfolios have left investors holding onto lower priced residual assets.
As Mr Tueta explains though, this is a necessary part of the secondary market correcting itself:
“Many investors have been caught out by distributions made by managers, and this is something that investors must be aware of when selling assets on the secondary market. By definition the assets remaining after a distribution are the least liquid, and bidding would necessarily be lower for any of these outstanding assets. Distributions are an important step in the clean up process so we are expecting to see more in the near future. While this may lead to short terms drops in the IAI, and a widening of the market dispersion, it is ultimately to the long term benefit to the recovery of the secondary market.”