Secondary hedge fund market set to grow

Redemptions expected to continue in 2009

By Wouter Klijn
Thu 02 Jul 2009

The secondary market for hedge funds is bound to flourish, a new report says.

The secondary market for hedge funds is expected to grow much larger as a result of the chaotic withdrawal of funds over the course of the credit crisis, a report by State Street has found.

"Investors restricted from redeeming their investment from hedge funds have demonstrated a willingness to sell their stakes to others at a discount," State Street said.

"Funds with cash to invest will find these opportunities attractive, because by acquiring these positions they also acquire whatever fee discounts the original investors had negotiated," the company said in its Vision Focus report published today.

State Street, which is the second largest administrator to hedge funds, expects to continue to see hedge fund redemptions this year.

But hedge funds have also been able to attract new inflows in the first quarter of this year, while some investors have cancelled their redemption requests, the company said.

"Anecdotal evidence suggests that even as investors make greater demands of hedge funds they are starting to regain confidence," State Street said.

Earlier this week, industry data provider Australian Fund Monitors said Australia-based hedge funds have managed to post three consecutive months of positive returns, bringing the performance of the sector to 5.9 per cent this calendar year.

This compares with a performance by the ASX 200 index of 2.58 per cent over the same period.

The performance has stemmed reports that hedge funds were a dying breed.

But hedge funds are likely to see stricter regulations from the government and this could affect investment returns, State Street said.

"If governments undertook a precipitous round of regulation, many believe the future of the hedge fund industry would be at risk," the company said.

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