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30/09/11

Pricing Risk for Hedge Fund Illiquid Assets

At Shelley capital, we take the view that the current debt crisis and economic slowdown could make the pricing of illiquid hedge funds assets more difficult and lead to delayed/reduced cash flow realisations. Against this uncertain climate, clients might consider transacting on the secondary market of hedge funds while they can.

Some forced selling might be on the cards in order to secure cash in hands now and not risk uncertain price realisations in three or four year’s time. A prolonged period of turbulence would negatively impact the pricing of illiquid hedge fund assets for a number of reasons:

  1. Cash-flow expectations may be significantly reduced, resulting in lower IRRs for buyers at current prices.
  2. An uncertain macro backdrop would exacerbate the inherent difficulty of valuing hedge-fund secondaries.  Additional provisioning at fund levels might therefore crop up.
  3. All classes of hedge-fund illiquids will be affected.  The PE features of most side pockets, for instance, make them directly correlated to the corporate sector, while ABL funds would suffer similarly from deteriorating credit conditions.

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