The Evolvence Capital Semi-Exotic Equity Derivatives (Ecseed) fund was launched in April with $50 million of assets. It invests in equity and equity-derivative instruments in blue-chip companies in the Gulf.
“Our business is GCC equities,” says Aaleddine Chahbi, head of convertibles and equity derivatives at the firm. “We also use derivatives in the investment process and are the only people to do so in the region.”
As there are no public equity derivatives markets in the Gulf, Evolvence uses OTC derivatives. These are products privately written by leading investment banks, such as Deutsche Bank, Credit Suisse, and Goldman Sachs. But as these banks don’t have local licences in most of the Gulf markets, typically they first have to buy the underlying stock from local counterparts. Short selling is not allowed in the Middle East so the Ecseed fund executes its positions synthetically using instruments such as calls, puts, futures and swaps. The only non-vanilla securities that Evolvence can buy in the public markets are 14 structured equity products listed on the Dubai International Financial Exchange.
Chahbi says that equity derivatives will become more acceptable to investors in the region as they seek to take advantage of the high volatility often seen in the Gulf markets.
One issue facing the fund is a lack of liquidity in most of the Gulf equity markets. Another is how Ecseed marks its positions. Chahbi says the fund takes only limited risk and marks to market, although it is unclear how easily this can be achieved, especially for its private trades.
As far as the investment process is concerned, the fund says it is research dependent. It identifies opportunities using a bottom-up approach. A structure is then designed to try to generate alpha. About 20% of the fund will invest in convertible sukuks, more than 50% in equity derivatives based on stocks listed on the Gulf markets and the rest in other areas such as North Africa.
Chahbi says no other asset manager in the region has the same skills as Evolvence. “There are a lot of long-only managers,” he says. “Each claims to be smarter than the other but none has a quantitative process to investing.”
He adds that Evolvence decided to set up its hedge fund to gain first-mover advantage. “We’ve created a private mini market for ourselves,” he says.
Khaled Al-Muhairy, who previously headed the North American department of the Abu Dhabi Investment Authority (Adia), is the founder of Evolvence. At Adia, he specialized in technology and telecommunication equity investments. Evolvence has more than $1 billion of assets across its funds deployed in the Gulf, India and the US.
