Hedgebay Trading Corporation has launched a new monthly index that will give the hedge fund industry a detailed insight into the average discount or premium to NAV that investors are paying for assets that have no contractual redemption rights to investors, such as “side-pockets” or for hedge funds that have suspended redemptions.
The Hedgebay Global Illiquid Asset Index (“IAI”), is the first time that a breakdown of liquidity data has been made available to investors. Illiquidity is the primary concern of hedge fund investors, with difficulties in providing accurate valuations of illiquid assets emerging as a key factor behind the collapse of several hedge funds over the last two years.
The IAI will be published each month alongside the Hedgebay Global Hedge Fund Secondary Market Index (“SMI”). The two indices work together to provide a holistic view of trends in the hedge fund sector and conditions in the overall market.
The SMI provides, among other things, a gauge of investor confidence levels, a reading on the price for liquidity of performing hedge fund assets and the IAI provides a deeper probe into the factors that are affecting investors’ valuation of assets which have no contractual redemption terms. The IAI can also be used to highlight trends occurring with the secondary market and potentially predict conditions of stress on the markets.
“Understanding how much it costs to monetize illiquid positions is key to market recovery and this is precisely what the IAI provides.” Elias Tueta, Co-founder of Hedgebay, said, “Performance of the primary hedge fund market over recent months may suggest that the industry is back to full force, but in reality this is a false dawn. This “strong performance” shadows the fact that every portfolio still holds a certain percentage of illiquid assets, and it is how investors deal with these illiquid assets on their books that will really dictate when the market recovers.
The two tiered market that currently exists is indicative of the fact that, although investors are showing confidence in liquid assets, the market is being offset by uncertainty about how investors can clear their balance sheets of illiquid assets.”
Summary of January 2010 IAI:
The average price for illiquid assets in January stands at a 43% discount to NAV, a small rise from the end of 2009. The average price for illiquid assets has held relatively steady over the last three months, suggesting that investors are still too wary of the risks illiquid assets represent to move into these assets. As a result, trading has focussed heavily on the more liquid assets within the market.
These findings have been supported by the January SMI, which has shown further development of the two-tiered market cited by Hedgebay in recent months. The average price for traded assets rose by eight points from December’s all time low average of 79% of NAV. However, while heavy trading in liquid assets drove the average price to 87%, dispersion between highest and lowest trades increased again. There was substantial trading at the lower end of the price scale, with the lowest trade occurring at just 29% of NAV. This movement at the bottom of the market was motivated largely by the illiquidity concerns highlighted by the IAI.