Financial Sector Phase Shift – Hedge Fund Investing Leads the Way

Financial Sector Phase Shift – Hedge Fund Investing Leads the Way
Written by Zachary Cefaratti – Risk Officer at Dalma Capital Management Limited, a DFSA regulated hedge fund manager in the DIFC

The financial services sector is rapidly developing within the GCC.  Following the setup of the DIFC (Dubai International Finance Centre) in 2004, the sector as a whole has progressed in the region substantially – with an increasing number of new firms offering a wider range of services.  The most recent acceleration over the last two years is stimulating a phase shift for the market.   Supply is moving swiftly to meet growing investor interest and is being supported by a favourable economic environment, sizeable capital inflows and regulatory reforms. 
At present, hedge funds are the increasingly popular choice for smart heavyweight investors from across the globe and the trend is building.  One of the most notable examples is the Abu Dhabi Investment Authority (ADIA), which currently invests more in hedge funds than any other organisation in the world.  According to research conducted by Preqin, the sovereign wealth fund currently has over $47 billion committed to hedge fund investments. 
In the post financial crisis climate, savvy investors worldwide are choosing to allocate their capital to elegant risk-adjusted strategies that hedge funds offer.  Increasingly sophisticated investors in the GCC are following ADIA’s lead, with the number of investors allocating to hedge funds more than doubling since the crisis according to Preqin.  Hedge Fund investments are primarily stemming from sovereign wealth funds, ultra high net worth individuals, pensions and astute family offices that have identified hedge funds as delivering the efficient and uncorrelated returns demanded by smart money.  Hedge fund activity in the GCC is expanding to meet the needs of investors who are seeking active management expertise and exposure to strategic asset classes.  This growth represents a new phase in the development of the UAE financial market.
The first major phase of development for the Gulf region’s financial services sector came in the 1970s.  The massive influx of petrodollars into the GCC throughout the decade created a seismic shift in power for global finance.  Central banks of the Gulf region emerged as significant providers of funds to the global banking system through petrodollar recycling and, in 1975, the Bahrain Monetary Authority created a new offshore banking centre to service the developing financial needs in the region. 
The next significant phase of development for the financial sector came about as assets from the petrodollar influx were placed into diversified holdings – spanning a much wider range of domestic and foreign industries and asset classes.  Diversification was the impetus of this phase change and the Gulf region broadly expanded its presence as a buyer within the global marketplace.  The financial sector evolved further in 2004 with the opening of the DIFC, which was designed to create a modern financial centre capable of servicing the financial needs of the regional economy.
We are now entering the next major phase of development for the region’s financial sector.  In April 2006 Argent Financial Group International LLP launched the first Dubai domiciled hedge fund under the leadership of Howard Leedham MBE – now CEO of Dalma Capital Management. The market is expanding and generating wider activity that is pushing forward development at a rapid pace.  New investment structures and strategies, flourishing investor interest and premier expertise are fuelling industry growth.  Furthermore, an evolving infrastructure is allowing the sector to strengthen consistently.  Stable regulation and strong economic fundamentals are further contributing towards creating the next chapter of financial sector development for the region.
Erudite investors from across the globe have been moving quickly to adopt the strategies hedge funds offer.   In particular large sovereign wealth funds alongside knowledgeable, experienced family offices and private investors have been investing heavily in the sector.  Investor interest is only increasing as 2014 progresses - stellar but recently wavering domestic equity market performance has reminded investors of the benefits of uncorrelated, diversified investments with shorting capabilities and absolute return profiles, such as those delivered by many hedge funds.
The role of the UAE in the global market is growing and conditions are in place for continued hedge fund growth in the region.  The robust regulation and business friendly attitude of the DIFC make it a likely candidate for attracting the significant financial resources and talent hedge funds provide.  Consequently, many industry participants are forecasting Dubai to be one of global financial powerhouses of the future.