Secondary Hedge Fund Market

Secondary Hedge Fund Market Activity Increases

The secondary hedge fund market has grown while other areas of the hedge fund industry have contracted during the financial crisis.   The secondary hedge fund market gives investors the opportunity to sell stakes in funds with long lockup periods or limits for redemptions as well as providing access to funds not currently accepting new investors.  The increase in secondary market activity is a result of managers trying to keep investors with long lock up periods and limiting redemptions.  Investors responded by turning to the secondary market to sell their stakes, usually at a heavy loss.

Hedgebay, a leading secondary market player that’s been in the business for a decade, helped investors buy and sell stakes representing roughly $1 billion in assets under management last year. The firm has completed more deals so far in 2009 than in all of last year.

Citco, a large banking and custody firm, has offered similar services for many years, while Swiss bank Credit Suisse (CS) and NYPPEX are also active in the market. But a slew of new rivals have entered this year, including CogentMarkets, SecondMarket, 2n20.com and the largest interdealer brokers ICAP and Tullett Prebon PLC (TLPR.LN).

So many firms have got into the nascent business that there may not be enough action for everyone to survive.  “A lot of players will show up when there’s money to be made,” said Bradley Alford, head of Atlanta-based Alpha Capital Management LLC. “There are all kinds of secondary hedge fund players now and not enough supply out there.”  Source

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Hedge Fund Fears

The Top 4 Hedge Fund Fears

Over the last 3 months and a series of conversations with hedge fund managers, prime brokerage professionals, administrators and marketers it seems there are 4 big fears in the industry right now.

Top 4 Hedge Fund Fears

1. A flat or highly volatile market for a period of more than 18-24 months – effectively wiping out those hedge funds which were hanging on for those greener pastures of another bull market.
2. Long-term deterioration of leverage of almost any type. While many hedge funds already use no or close to no leverage many others use large amounts of it and many funds would be hampered if new regulations are put into place which severely limit their access to it. Read an article on this topic here.
3. Desperate hedge fund managers committing enough fraud to scare off a large percentage of the High net worth and ultra high net worth investor base. There is article on my site on ethics located here.
4. Overbearing regulation which pushes hedge fund activity into Canada, over to London and across the world away from New York. The industry is already suffering large redemption losses and regulation done the wrong way could stifle further innovation or at least push even more of it offshore. As the recently hedge fund testimony showed, many hedge funds are open to some forms of regulation or over-sight but these must be done in ways which are sensitive to the intellectual knowledge and security disclosure concerns specific to this industry. Listen to the recent congressional testimony by hedge fund managers by clicking here.

Other interesting points that have come out of talking to hedge funds – most expect the markets to stay flat or negative for an additional 6-9 months and the majority see this to be a huge opportunity for positioning their fund for explosive growth in 2010 and 2011.

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Hedge Funds Crush Mutual Funds

Interesting fact for anyone out there working in the hedge fund industry or tracking its growth. In 2007 hedge funds have gained over $279 billion in assets while mutual funds have only gained $79 billion.

“The hedge fund industry’s 3.5% return in October was the highest in the past seven years,” says Sol Waksman, chief executive officer of BarclayHedge Ltd. “Nevertheless, recent market turmoil has made investors a bit more cautious about investing in hedge funds.”

- Richard

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Article Source: HedgeWeek

Hedge Fund Redemptions

After investing in hedge funds some accredited investors have a much harder time getting their money out of a hedge fund then into them. While this is often preventable it is usually the result of:

• Preset lockup periods where investors must keep their money in the fund for a minimum of 6 months to 3 years depending on the fund mandate but negotiable
• The liquidity of the asset classes the hedge fund deals with. Some hedge funds work in such illiquid markets that they will have redemption clauses in their contracts that allow them to wait 3-12 months for more liquid markets before being forced to sell a position.
• Arbitration. The process of going through arbitration and looking at which funds have been through it before can vary widely and be difficult. While a definate exception to the rule if you get invested with a rogue hedge fund manager you might have to chase them through arbitration or other legal means to redeem your initial investment.

All of this lends to making sure you have your investment goals and expectations clearly defined so they can included in research a hedge fund consultant does for you and so you can just keep these extra thing in mind while doing research yourself. Many hedge funds do not have lockup periods of more than 3-6 months and the majority work in relatively liquid markets. As the Financial Times put it, “The salutary lesson for those wanting to invest directly in hedge funds is that, under the commonly used limited partnership framework, they are, in effect, going into business with a managing partner, not just investing.”

Read dozens of additional articles like this within the guide to Hedge Fund Terms and Definitions.

- Richard

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Story Source: FT

Picture Source: Credit E

Hedge Funds The Root of All Financial Evil?

This is what could sometimes be construed by reading through various news publications reporting the fraudulent acts and losses that are well documented among the almost 10,000 hedge funds in existence today. Recently though hedge fund professionals and those outside the industry have been trying to correct this image.

The head of the Financial Services Authority (FSA) said that, “hedge funds were not the catalysts or drivers of this summer’s events.” Additionally the deputy governor of the Bank of England stated that “hedge funds have not been blown away by the first signs of real market stress, as some commentators thought they would be.”

This is important to note because it is the equivalent of Alan Greenspan and speaking up to clear the air on stop the continuous finger pointing at hedge funds whenever there is volatility in the marketplace. Many hedge funds provide liquidity when there otherwise would be none, they create a more “perfect” market to trade in.

- Richard

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