Paul Watthey, marketing director for EMEA at Advent Software, estimates that there are approaching 60 hedge funds in Bahrain as well as a smaller number in Dubai. "There has not been the surge in the number of managers that was expected," he says. "We estimate about $3 billion in assets under management in hedge fund firms in Bahrain at present, but interest from investors is growing."
The appeal for domestic investors, says Watthey, is the diversification that hedge funds offer. "In the alternatives sector, Middle Eastern investors have had a strong bias towards private equity and real estate. And with the strong returns in domestic stock markets, there has been a sense of ‘why bother investing in hedge funds?’. As those returns have come off, that mentality is now changing and local investors are looking to diversify." Among those investors are sovereign wealth funds, and wealthy investors in Saudi Arabia, says Watthey.
Long-only managers
Whether the funds being set up are truly hedge funds, however, is open to debate. "In many cases, MENA hedge funds are little more than long-only managers charging hedge fund fees," says Francis Akpata, head of investor relations at family office Acropolis Capital in London. Acropolis runs an internal fund of hedge funds and is considering allocating to the region. Akpata calls the long-only funds "exotic beta funds" which, he says, are producing interesting returns by simply investing in a region that has been unscathed by the credit crunch, and where underlying economies are booming. While these funds are not traditional hedge funds, they are seeking interest from international hedge fund investors looking for geographical diversification of their portfolios. "At present, investing in the Gulf is not just a means of potentially generating good returns for international investors but also a way to reduce risk via genuine diversification," says Akpata. "Their allocations diversify risk because they have little correlation with global equity markets and only about 1% of the Gulf equities are part of the MSCI emerging markets or any other major market index.
 |
|
"In the midst of the global credit crunch the Middle Eastern and North African countries have strong balance sheets"
Francis Akpata, Acropolis Capital |
"The current economic state of affairs in the Gulf region is unique because it is growing and their dependence on commodities like oil is reducing. In the midst of the global credit crunch the Middle Eastern and North African countries have strong balance sheets; as at the end of 2006 their foreign assets were about $2 trillion."
A solid understanding of local markets is essential, however, say investors. Chris Keen, a partner at London-based fund of hedge funds Culross Global Management, says his firm is quite wary of allocating to MENA funds. "The valuations of Middle Eastern corporates are heavily impacted by oil-related government spending, and judgment of economic spending becomes more important than stock-picking itself. Given the influence of oil-related spending on the valuation of Middle Eastern stock markets, we view them as being vulnerable to event threat."
Keen compares the potential event threat to situations that have occurred in emerging market economies such as Latin America. "When stock markets are influenced by government spending, then there is a concern. There are a number of times in South America where governments got things badly wrong and investors were crucified. Unless investors understood the danger of that type of event, it didn’t matter how good they were at picking stocks, they were going to lose money."
Positive signs
Opportunities for alpha, however, do exist in the region, argue some investors, and a hedge fund industry could be created there. Some of the local markets are relatively undeveloped and information is difficult to get as a result. This information inefficiency can work well for arbitrage opportunities if managers are on the ground and have a local advantage. Akpata says: "The MENA fund managers hope to get high returns for international investors as they see many mispriced assets in a market primarily dominated by retail investors. Equally, international investors strive for good returns from their allocations because the MENA region contains markets and equities that have not been adequately researched. Furthermore, the currencies of several GCC countries are pegged to the US dollar but are considering revaluing, which would give fund managers an additional opportunity to generate returns."
Watthey says the Dubai International Financial Centre and Bahrain Economic Development Board both want to encourage the growth of hedge funds in their respective countries and that infrastructure has been developing.
"We are seeing fund administrators and prime brokers setting up in the region, and that is a positive sign that a hedge fund market is going to take off there," he says.