DUBAI, 5 March 2008 — The impact of tremendous liquidity in the Gulf region is driven by large oil and gas reserves, negative interest rates in several Gulf countries as a result of currency pegs to the dollar and massive infrastructure spending of about $1.3 trillion, Nasser Al-Shaali, chief executive officer of Dubai International Finance Center (DIFC), said while addressing the opening session of the 9th Hedge Funds World Middle East 2008 conference here yesterday.
The two-day conference, organized by Terrapinn, was attended by over 600 delegates. The event comes at a time of much financial market uncertainty bringing hedge funds to the attention of many investors.
Expounding the effects of the US economy on the region, Al-Shaali said: “While economists are divided on whether the United States will go into recession, and how it would affect the rest of the world, there is little disagreement that Middle East in general and the Gulf region in particular, is set for a period of sustained economic growth in both short and medium term.”
The reason for this sustained growth, he said, was that “financial and commercial markets in the Gulf are liberalizing.”
“The Gulf companies are becoming more sophisticated about how they source capital for growth and expansion, and investors are demanding more delicate vehicles to preserve and enhance their growing wealth,” he added.
Citing a recent report by the Merrill Lynch/Cap Gemini, he said the number of high-networth individuals in the Middle East would grow at a rate of 9.1 percent until 2009 — the highest growth rate for any region in the world.
PriceWaterhouseCoopers forecasts that total Middle East Wealth will reach about $3.6 trillion this year. This forecast is embellished by the fact that regional capital markets are growing and increasingly offering both issuers and investors new and more sophisticated instruments.
Al-Shaali said, “The Gulf region is attracting more and more global interest from institutions and high-networth individuals looking for exposure to these markets - both because of their attractive returns and because of the diversification that they offer.”
The increasing maturity of MENA capital markets includes tremendous growth in traditional areas such as equities through massive growth in conventional corporate bonds Sukuk.
The DIFC CEO also highlighted the fact that Ernst & Young has estimated that Middle East institutions will increase their investment in hedge funds at a compound annual growth rate of 28 percent a year between 2005 and 2010. This, Al-Shaali said, means they will put more than $100 billion in hedge funds by 2010.
In the last three years, two commodity exchanges have opened in Dubai - the Dubai Mercantile Exchange at DIFC and the Dubai Gold & Commodities Exchange - offering future contracts on a variety of metals and crude oil.
“With growing demand for alternative investment vehicles and increasing variety of locally-based tools, we see funds requiring a local presence in the heart of this market. That’s where DIFC comes in. As a world-class financial center with a best-practices regulatory environment, DIFC is the ideal home for a wide range of funds, including hedge funds,” Al-Shaali said.
Peter Clarke, chief executive of Man Group, was of the view that growth in asset class remained persuasive. He said, “On the institutional side there is a clear trend toward increasing allocations supported by liability funding mismatches among other motivations as well as the potential for petrodollars.
“On the high-networth and ultra high-networth side, although percentage shares versus institutional are diminishing, absolute flows look set to remain healthy as it is supported by burgeoning emerging market wealth and increased longevity.”
Antoine Massad, chief executive of Man Investments Middle East Ltd., who chaired the morning session, said: “The turmoil in global financial markets in the past six months has set an intriguing backdrop for examination of hedge funds in the Middle East region.
“After more than two decades of using hedge funds, private client investors from the Gulf Cooperation Council states have become familiar with their value as a source of additional return and downside protection in their portfolios. But the financial climate has not often presented as many opportunities and challenges as we see today.”
He added, “The new initiatives by financial regulators and the dynamism of local markets have made the GCC an attractive market for hedge fund providers.”