Busy market for illiquid hedge fund assets predicted

Secondary markets for hedge fund stakes will receive another boost this year thanks to seismic trends reshaping the industry, says Neil Campbell, head of alternatives at ­UK-based brokers Tullett Prebon.

He expects private market trading volumes to recede by mid-2011 as buyers appeared even for the least liquid stakes left over from gating and suspensions in 2008-09. But as he says: “We ended up having a busy year in 2011, and 2012 looks like another strong one. The market probably has another 18 months of strong transactions to go.”

In 2011, Europeans were involved in about 80% of all deals, including 10% as buyers. Some prominent firms have already signalled their ­intention for involvement. Deutsche Bank is ­establishing a fund to buy illiquid or damaged positions, and estimated $80bn and $100bn of ‘problem assets’ are still stuck in portfolios.

Campbell (pictured) says former hedge fund and bank traders have established their own portfolios, to manage down individual stakes or small portfolios at a profit. Private equity funds also became buyers over the past nine months “because some stakes are so illiquid, they are like private equity”.

On the sell side, Campbell highlights fund liquidators and allocators seizing control of portfolios, as well as industry M&A activity, including of funds of funds as fuelling supply of unwanted stakes.

“The fund of funds model, for example, is under review and ­businesses are winding down. If they are sold or merged, the question is what items will a new owner want to keep? Especially in North America, [funds of funds] are about critical mass. There will be huge rationalisation in the industry, and the buyers might not want most of the items.”

This may be especially true if the items are comparatively small.

Another impetus for supply is ­liquidators now winding down funds from the crisis. Almost 2,600 hedge started up between 2009 and September 2011, but more than 2,300 closed down, some involuntarily.

“A lot is now in the hands of the Cayman Islands liquidators, who are making the decisions and may say they do not want to hold some of the [positions],” Campbell says.

In some cases, investors have even voted out the manager, so they and liquidators are controlling the winding down at their own speed.


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