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Opportunity knocks for financial services players

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Over the past few years, there has been considerable economic growth and an increase in prosperity across the Middle East, which has fuelled a significant investment boom.

Over the past few years, there has been considerable economic growth and an increase in prosperity across the Middle East, which has fuelled a significant investment boom.

As the financial crisis takes the steam out of investing in the west, investments in the Middle East that have been steadily rising, are now poised to intensify. Financial players and institutions are finding the region an even more interesting destination for their emerging market funds as the Middle East develops into a favorable and long-term investment location.

Short term and speculative investors are now seen leaving the region, and longer-term and seasoned investors are stepping into the fray. And this can only be a good thing considering the need for stable and enduring financing options, experts say. ‘Given the recent decline in many of the region’s equity markets, investors are able to enter at valuation levels which have not been available for years. With the Western Hemisphere in for a sharp economic contraction, coupled with the uncertainty in established emerging markets such as Russia, India and China, the Middle East is now being seen as an attractive, long-term investment destination for many types of investors. Certainly, there is earnings growth potential of 20-25 per cent in the next several years," emphasises Eric Swats, head of asset management at Rasmala Investments.

At the same time, with financial markets and traditional investments facing a downfall, investors are keen to turn their eye to alternative investments. Globally, at a time when most traditional investments are generating low levels of returns, or even losses, institutional investors are increasingly becoming attracted to hedge funds.

But what stands out is not only the move towards other asset classes but also that towards other, trendier locations. Geographical diversification in investments plays a strong role in the current times and many investors foresee the Middle East to be the next big thing in terms of hedge fund investment. But while the region has made a lot of headway in enticing investors, a lot more work needs to be done, observers claim.

The flexibility and the increase of raising capital in the Middle East are facilitating the development of the financial centres in areas such as Dubai, Bahrain and Qatar. Due to this financial centre empowerment, along with the tax concessions and changing regulatory regimes, these countries are now being compared with some of the key financial jurisdictions around the globe.

Mark Weller, managing director for EMEA and Asia, PerTrac Financial Solutions, says,’We’re seeing strong demand from government agencies, including one sovereign wealth fund that has become a PerTrac client, and a lot of commercial banks in the region have started to invest their own and clients’ capital in hedge funds.’
 
 ‘Dubai has been trying aggressively to bring fund providers into the region and they’ve had a degree of success, but they face the challenge that on a global level the competition to be a home to hedge funds is hotting up.’
 
 ‘One trend we have seen is that a number of our Western and Asian clients are establishing a hub in Dubai, in many cases more a marketing office than anything else.’

In terms of alternative investment, the Middle East is set to become increasingly active in the global hedge fund industry, with the UAE and Qatar playing potentially dominant roles in the region, according to research conducted by Mirabaud. It forecasts that hedge funds will become increasingly attractive to the region’s ever-more sophisticated regional investors, especially given the high levels of excess liquidity in the Middle East.

In the research, Gilles Rollet, CEO of Mirabaud (Middle East) Limited, says: ‘While Middle East capital markets have not yet reached the same level of maturity, they are quickly moving in the right direction. In the UAE and Qatar, in particular, the markets and the level of regulatory oversight continue to achieve significant progress.’

Bahrain is a strong contender in this area and Dubai is also determined to establish a competent global hedge fund centre. ‘The authorities know it’s a booming industry and they want to capture flows that are leaving the region to invest in international hedge funds,’ one industry expert explains. As such, the outlook for hedge funds and other alternative investment classes in the region is expanding.

Take Dubai for example. The Dubai International Financial Centre (DIFC) has put in place both the infrastructure and the regulatory framework to foster the growth of hedge funds. Private client investors from the GCC states are also becoming familiar with the value of hedge funds as a source of additional returns and downside protection in their portfolios. Investors from outside the Gulf region are increasingly looking for investment vehicles with healthy returns that are established in stable environments and experts have said that structured products based in the Gulf, particularly hedge funds, are the perfect example.

Clearly, there is an opportunity for international hedge fund managers to capitalise on the emerging interest in hedge funds in the Middle East – and for promoters of structured products, which are even more in demand. However, fund management needs to develop more fully, offering hedge fund products managed out of the region and not just those sold into the region. This process has begun in Dubai where new fund management companies are registering in the DIFC along with specialised administrators and other industry support groups.

Matthew Lamb, head of Middle East wholesale and institutional clients at GAM, says, ‘One of the key reasons to get a presence on the ground was that we could not only develop local business but service many of the global financial institutions that now have a presence there. When investing in GAM, our clients have an expectation of service we should deliver and having offices globally is key to delivering on that expectation.’
 
 ‘Having a local presence not just in terms of distribution, but also from a fund management perspective, is certainly a key differentiator. When we talk to local firms and family offices, they appreciate that we have an in-depth understanding of the region and are often as eager to talk to us as we are to them.’
 
‘Globally we’re experiencing a period of unprecedented volatility and uncertainty. The fund management industry as a whole is experiencing outflows as a direct result of clients responding to the current market environment. We continue to believe there will be opportunities for growth in some key markets, and the Middle East is certainly one of those areas.’

Recent regulatory moves have also created healthy financial environments suitable to the creation of hedge funds. Dubai’s creation of its Hedge Fund Code, Bahrain’s introduction of its Collective Investment Scheme Regulations and Qatar’s launch of its Qatar Financial Centre are some of the most prominent examples.

In the research paper, Mirbaud’s Rollet adds: ‘A hedge fund-friendly environment can be seen to emerge from a region with high levels of excess liquidity and strong degrees of professionalism among regulators and service providers. The Middle East is well known for its access to enormous amounts of excess liquidity due to the high price of oil. In the UAE and Qatar, we are now seeing professionalism from both regulators and service providers grow steadily. Both countries have governments that are committed to forging legal structures that allow for increasing financial sophistication in their respective financial districts. If current trends continue, these two countries will undoubtedly emerge as hedge fund centres, and given enough time, will stand on par with Singapore, Hong Kong and even London and New York.’

However, some experts believe that the current troubled era might have hampered the anticipated growth in the Middle East for facilitating hedge funds. A good alternative investment jurisdiction revolves around a healthy mix of low taxation, relaxed regulation, excellent infrastructure and available and skilled staff. While improvements have been made – sometimes at a very quick pace – the recent crisis may be hampering the previously estimated development.

The current state of the region’s financial and regulatory infrastructure is some way behind the developed markets. Nonetheless, change is constantly occurring. The commitment of states such as Qatar and the UAE is emphasised by the pace of change in building competitive financial markets. The UAE, in particular, has been active in consulting with hedge fund firms and their service providers with the aim of formulating a balanced regulatory regime.

Moreover, it is becoming easier for hedge funds to establish themselves in the DIFC and trade on the DIFX, with the legal regime governing such operations in a refinement stage.

Hedge fund investment in the Middle East offers unique opportunities, but the region’s greatest challenge is likely to be in facilitating and administrating the growth potential. To be on a competitive front, the countries in the region must focus on lowering trade and investment barriers and improving infrastructure. Most important of all is the focus they must put on educating the next generation to handle the wealth that is now being produced.

The Middle East offers strong potential returns with low correlations to both developed and other emerging markets and the importance of presence of investment teams on the ground in the region cannot be underestimated. The Middle East is and will continue to be a major attraction for the global players catering to the hedge fund industry. Opportunity – even in these troubled times – seems to be knocking.

 

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