Friday, August 13, 2010

Risk aversion in the Secondary Hedge Fund Market

HedgeBay, "the Ebay" for illiquid Hedge and Private Equity Participations, independent secondary market platform for trading illiquid fund shares, has just issued their latest index report, which shows again  further deterioration of investors willingness to take risks - despite record low yields on all other asset classes and mountains of cash sitting around:

"Activity for the month of July was average for this time of the year. The index decreased in value by a little more than 300 basis points to 75. Dispersion narrowed to 35 points. The lack of “near par” transactions was abundantly obvious again in  July with all of the activity taking place in gated, suspended or side pocketed assets. With investors continuing to put money to work on the primary side of the market in liquid funds, they continue to show their general lack of willingness to accept lock ups."

This is the accompanying chart of their index, which measures at which price their average transaction takes place relative to the Net Asset Value of each fund traded:

This is actually not good. As only sophisticated or larger investors participate in HedgeBay, this clearly shows a strongly deteriorating willingness of this investor class to engage in illiquid fund participations in private equity and hedge funds.

Of course, many of these are sidepockets that are unloaded, but it is quite telling that we are now - on average - trading at 73% to NAV compared to about 85% of NAV during 2009, and even lower than in March 2009, the bottom of the Great Crash!

Or - wait a minute - could this actually be a good contrarian signal ? 
As long as bond yields fall and equities go sideways to down, we have some doubts ...

 Link to HedgeBay's latest Report.

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