9 Jun 2010
The explosion in pension funds’ use of the hedge fund secondary market has given the clearest indication yet that the secondary market industry has become part of the financial mainstream, says Hedgebay Trading.
The last four years has seen a dramatic change in the demographic of Hedgebay’s users, characterised by a shift in attitude among large institutional investors such as pension funds and insurance companies. Historically, Hedgebay’s users have been traditional hedge fund investors such as family offices, banks and funds of hedge funds. In recent years however, institutional investors, as well as endowments and insurance companies, have become increasingly active.
In 2007, just 1.4% of Hedgebay’s users were institutions (defined as pension funds, endowments, foundations and insurance companies) compared to nearly 12% in 2010. From the start of 2008 to the end of 2009, there was a remarkable 10 fold increase in pension fund activity, while trading by insurance companies rose 250% over the same period. Elias Tueta, co-founder of Hedgebay, believes that these figures show that secondary marketing trading is now an essential element of the hedge fund industry:
Hedgebay founded the hedge fund secondary market in 1999. The firm has witnessed how the industry has developed over the last decade, and believes that the credit crunch has had a dramatic effect on how the secondary market is being used. In previous years, the vast majority of activity was focused on trying to gain access to high performing funds that had been closed to new investors.
An analysis of the trading over the last year has shown that, with the gradual withdrawal of crisis conditions, the priorities of investors have changed. The need for gathering the maximum amount of liquidity from their portfolios has abated and their focus is on cleaning their portfolios in preparation for a market recovery. While Hedgebay feel that these trading patterns will continue for a year or two, the firm believes that the secondary market has an invaluable role to play post-recovery:
The last four years has seen a dramatic change in the demographic of Hedgebay’s users, characterised by a shift in attitude among large institutional investors such as pension funds and insurance companies. Historically, Hedgebay’s users have been traditional hedge fund investors such as family offices, banks and funds of hedge funds. In recent years however, institutional investors, as well as endowments and insurance companies, have become increasingly active.
In 2007, just 1.4% of Hedgebay’s users were institutions (defined as pension funds, endowments, foundations and insurance companies) compared to nearly 12% in 2010. From the start of 2008 to the end of 2009, there was a remarkable 10 fold increase in pension fund activity, while trading by insurance companies rose 250% over the same period. Elias Tueta, co-founder of Hedgebay, believes that these figures show that secondary marketing trading is now an essential element of the hedge fund industry:
“Pension funds are rarely, if ever, early adopters. By their nature, the type of assets they manage and their necessary aversion to risk of any kind, they are extremely cautious, and that makes them very reliable barometers of industry maturation. The institutional activity we’ve seen is incontrovertible evidence that the secondary market is now a key feature of the asset management landscape.”
Hedgebay founded the hedge fund secondary market in 1999. The firm has witnessed how the industry has developed over the last decade, and believes that the credit crunch has had a dramatic effect on how the secondary market is being used. In previous years, the vast majority of activity was focused on trying to gain access to high performing funds that had been closed to new investors.
Since 2007, the nature of trading has changed dramatically, as Mr. Tueta explains: “Since liquidity evaporated from the market, we have seen cash requirements become the priority. Every type of investor, from high net worth individuals to pension funds, suffered heavily during the crisis, and in the search for liquidity they turned to the secondary market. As a result, we saw a surge in secondary trading and a fundamental shift in the way that it is being used.”
An analysis of the trading over the last year has shown that, with the gradual withdrawal of crisis conditions, the priorities of investors have changed. The need for gathering the maximum amount of liquidity from their portfolios has abated and their focus is on cleaning their portfolios in preparation for a market recovery. While Hedgebay feel that these trading patterns will continue for a year or two, the firm believes that the secondary market has an invaluable role to play post-recovery:
“The secondary market will play a vital part in the recovery of the hedge fund industry, and thereafter. As global markets recover, we will see more funds close to new investors, or respond to high demand by offering lock ups. With the establishment of the secondary market as unquestioned, the use of secondary liquidity will be key to a manager’s ability to get longer lock-ups from their investors.”
“Moreover, the use of secondary trading as a risk mitigating tool has commonplace value for any money manager. The ability to swap out of positions and to get a hold of liquidity at short notice can significantly reduce investment risk. With the secondary market acting as safety net, we can expect to see pension funds increasing their hedge fund allocation in the future.”
