Study is first to examine the secondary market for stakes in hedge funds
May 5th, 2008 | Filed under: Investment Management FeesSeveral commentators on these pages have wriiten about the hedge fund liquidity premium. While it makes intuitive sense that investors demand compensation for locking in their money, it can be notoriously difficult to put a price on hedge fund attributes such as this. When the only decision facing an investor is binary - to invest or not to invest - it is difficult to get a picture of the full demand curve for a particular fund. Unlike in most other markets, investors don’t bid up or bid down the price of a hedge fund in an open market.
But there is one rough approximation of such a market for hedge funds. And now one enterprising academic has used data from that market to determine how much investors value things like lock-ups and various other characteristics of hedge funds. That secondary hedge fund market is Bahamas-based Hedgebay. Every month, Hedgebay brings together buyers and sellers of stakes in (mostly closed) hedge funds. The funds trade at a discount or premium to their net asset value (NAV) depending on various factors.
In a study published in March, Tarun Ramadorai of Oxford University used 10 years of Hedgebay trading data to determine the effect of those factors on the premium or discount for a stake in one of the funds traded on the market. Over the 10 year period analyzed, buyers have been paying a premium for these stakes in closed hedge funds. The chart below was crated using data from the study and shows the premia and commissions paid for about 870 hedge fund stakes (excludes about 70 blow-ups that generally sold at around a 50% discount).
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