DUBAI, 10 March 2008 — The economies of the Middle East continue to benefit from the sustained boom in oil prices which reached a recent all-time high of $106 a barrel. Current account surpluses continue to grow, investment in infrastructure and technology are at record highs and financial markets are awash in liquidity. Local investors who already hold over $1 trillion in overseas assets, are actively seeking to diversify into alternative investments. In a mission to generate high returns and diversify risk, Middle East investors are becoming more adventurous, taking high profile equity stakes in overseas companies and moving into real estate, private equity and increasingly, hedge funds.
Antoine Massad, chief executive of Man Investments Middle East Limited, part of Man Group PLC, an international financial services company listed on the London Stock Exchange which is also a constituent of the FTSE 100 Index of major companies, spoke to Arab News on the sidelines of 9th Hedge Funds World Middle East Conference, held in Dubai last week. In the following interview, Massad talks about the opportunities and challenges facing investors. Following are excerpts from the interview:
Q. Man Investments is very active in the Gulf. Can you describe its activities in the region?
A. Man Investments has had a presence in the Gulf since 1985 and has played an active role in developing the hedge fund industry in the region. We have invested heavily in education, participating in events such as the annual Hedge Funds World Middle East Conference which is in its ninth year this year. We work closely with a number of local partners to develop and distribute products tailored to the needs of sophisticated Arab investors on a retail basis. We are also developing a growing institutional client base which seeks stable, repeatable investment returns with a low correlation to other asset classes.
Q. How much is under Man’s management? What is the growth rate for the last three years?
A. We currently have an estimated $72 billion, compared to $49.9 billion in 2006, $43.0 billion in 2005 and $38.5 billion in 2004.
Q. The global hedge fund industry is currently estimated to be worth $2 trillion. What further scope do you see for hedge funds?
A. Hedge funds managed $1.74 trillion in assets at the middle of 2007 compared to $39 billion in 1990, according to Hedge Fund Research Inc. By comparison, the Investment Company Institute estimates that mutual funds manage approximately $21.8 trillion worldwide at the end of 2006. It is clear, therefore, that despite strong recent growth, hedge funds still comprise a very small proportion of global investment assets, leaving substantial scope for future growth. The asset class also continues to evolve, constantly expanding into new markets and strategies. This leads us to believe that the industry should continue to grow in the region of 15-20 percent per annum over the short to medium term. We estimate that assets under management will reach $3.5 trillion by 2012. To put this in perspective, it is estimated that by 2011, high networth individuals’ wealth (HNWI) forecast will surpass the $51 trillion mark.
Q. Hedge funds are often linked to takeovers or other big trades in the financial markets. What is your perception of hedge funds?
A. Hedge funds apply active, skill-based investment approaches in the pursuit of absolute returns — positive gains regardless of whether markets are rising or falling. These approaches are extremely diverse, ranging from short selling, arbitraging price inefficiencies between related instruments, and others. Only a small percentage of these funds are involved in mergers and acquisitions.
On the whole, we believe that this kind of investing has helped to make markets operate better by easing pricing inefficiencies, bringing needed liquidity to less explored market sectors and promoting the interests of stockholders. Hedge funds have revitalized capital markets, providing investors with a strong alternative to stocks during the recent extended bear market and keeping capital employed when it would otherwise have been held in cash and providing strong incentives for financial professionals to seek out and develop new markets and strategies.
Q. As stock markets in the Gulf are not doing well, what chances do you see for alternative investments?
A. Poor returns from their equity portfolios have persuaded investors to consider hedge funds, but equally investors should consider locking in profits made during equity market booms and investing those in hedge funds.
Ultimately, hedge funds provide separate sources of return in a portfolio of investments that can improve the overall performance of that portfolio and reduce risk to the investor and should be considered regardless of current market performance.
Q. Investors in Saudi Arabia are looking for more investment avenues after having their fingers burned in the stock market. Man Investments has no representation in Saudi Arabia. Do you plan to open an office in Saudi Arabia in the near future?
A. Man Investments has a number of institutional and private clients in Saudi Arabia. These clients are served by our regional office in Dubai and a dedicated team specifically focused on Saudi Arabia, supported by Man Investments’ global service infrastructure.
Q. What are your views on the use of alternative investments in Middle East wealth management strategies?
A. We believe that alternative investments are a critical component of any wealth management strategy, offering rich diversification, performance and structuring benefits.
Q. Most of the banks are launching Shariah-compliant products not only in Middle East but in Europe and Asia also. As Man Investments is very active in this region, do you have any Shariah-compliant products?
A. We do not currently have any Shariah-compliant products.
Q. Where is the growing Islamic finance market heading?
A. Islamic finance has enormous potential and we are watching developments with great interest.
Q. What are the opportunities and challenges for investors in 2008?
A. We advise investors not to take a short-term view, but to build up a robust portfolio diversified over a range of asset classes which will deliver in the long term.
Q. Hedge funds are always criticized for lack of governance and regulations. Do you agree?
A. Man Investments is regulated by a number of regulatory bodies around the world. We actively support regulation that safeguards investors while protecting the ability of hedge funds to generate investment returns and work closely with lawmakers in a number of countries to identify and implement best practices for hedge fund investment.
