DUBAI, 7 March 2005 — Hedge funds providers must adapt to the changing environment as the industry enters a period of consolidation in its transition from a boom industry to the mainstay of asset management.
This was the clarion call made at the sixth annual hedge funds world Middle East conference as experts brainstormed in Dubai last week for three days on the future development of the industry in the region.
Conference Chairman Antoine Massad, associate director, Middle East and Asia at Man Investments, Dubai, said: “The alternative investment industry is at the point of making the transition from a boom industry to becoming a mainstay of the asset management. The next five years will bring greater regulation, consolidation, standardization of IT and reporting, and increasing regionalization of products. Therefore, hedge funds providers will have to adapt to this new environment and only those who have the capacity to invest in research and product development and in exploring new markets and opportunities will survive this transformation.”
As for the Middle East, he said “We expect Arab investors will increase their allocation to hedge funds to 8 -10 percent of assets within the next decade. This is in line with developments in the United States, the most developed hedge funds market in the world. The bulk of this new investment will be through third parties as investors outsource investment selection and product management.”
The Arab region is very important for the industry because of its high concentration of wealth, Massad said.
“In this environment, funds of hedge funds will differentiate themselves through their ability to deliver innovative product structures and access premier investment capacity. This will clearly favor the established industry players, who have the resources and presence within the industry to source the best personnel, investments, technology and to invest in research and product development,” he added.
The fund of hedge funds arena was the fastest growing segment of the industry in 2004. There are now a relatively large number of funds of hedge fund providers competing for limited access to high quality single hedge fund managers.
Mohamed Seif ElNasr, deputy treasurer at the Saudi National Commercial Bank (NCB), Bahrain, dealt with “Rising to the challenges faced by hedge funds investors.” He focused on changing market dynamics: The shifting risk and return equation, portfolio construction and converging management styles, suitable hedge fund allocation, developing a “fit” within the overall asset allocation and selective use of strategy and style combinations to fit investor needs.
Abdulaziz Abdulmohsen Al-Duweesh, fund manager, treasury and international securities, National Investments Company, Kuwait, said Middle East capital markets do not have the necessary financial tools to enable hedge funds strategies, limiting investors to hedge funds managed in overseas capital markets. Most investment companies/banks offer “white labeled” fund of hedge funds products and others construct their own fund of hedge funds by investing overseas in single strategy funds.
Christoph Moeller, managing director, global sales & marketing, Man Investment, Zurich, in his address on “Hedge funds review and outlook,” said the hedge funds asset growth is expected in the range of 15-20 percent over the next 5 years, and added that the industry is undergoing convergence and consolidation. He said institutions had indicated that they intended to increase allocations to alternatives, fund of hedge funds.
Pradeep Mehta, vice president, managed funds, Arab Banking Corporation (ABC), Bahrain, also highlighted the need for an institutional hedge funds portfolio.
The hedge funds industry has evolved considerably in the last few years. This continued in 2004 with increased asset flows and institutional interest bringing clearer structure and greater accountability to the industry.
The hedge funds industry continues to boom and its assets have surpassed the $1 trillion mark, according to a recent survey conducted by the Alternative Fund Services Review. The number of hedge funds globally has also gone up from around 6,000 two years ago to around 10,000 now.
The conference, which was held from Feb. 28 to March 2, at Jumeirah Beach Hotel, Dubai, is the Middle East’s premier event for alternative investment strategies, attracting over 500 participants, including senior regulators and high-level executives from all sectors of the financial services industry.