The secondary market in hedge funds is not as little-known as it used to be. Brokers say that big investors are more prone than ever to get out of their positions by selling them — especially in instances where managers have put up redemption gates.
Barry Silbert, CEO of New York–based SecondMarket, which makes secondary trading in illiquid assets, says discounts are inherent in the secondary market. Jared Herman agrees. He’s a co-founder of Hedgebay Trading Corp., a secondary-market clearinghouse (listings on Hedgebay include shares in Farallon Capital Management and Marathon Capital Management). Herman says that in December the average discount was 13 percent of the net asset value, up from 12.5 percent in November.
Proponents of the secondary market also note that it can offer investors a way into a fund that might not otherwise be available and that taking a position below a fund’s high-water mark may mean paying lower fees. Managers benefit too because the secondary market offers a way to satisfy disgruntled limited partners who want out. On the flip side, cautions New York–based Watson Wyatt Worldwide hedge fund research chief David Gold, “Many of the offerings are out there for the wrong reason — because the manager is struggling — so that you’re basically inheriting a new set of business risks.”
And since each hedge fund has its own criteria for transferring limited-partnership interests, John Godden, CEO of IGS Group, a London-based consultant, says “managed accounts,” professionally tailored to an investor’s risk appetite, can help expand the secondary market. “We think that there will be a move toward managed-account platforms, where one investor can move more easily from one hedge fund to another.”
