ME investors' share in hedge funds to hit $194b

Date: Wednesday, April 22, 2009
Author: TradeArebia News Service

The Middle East investors’ share of hedge fund assets is set to rise almost 30 per cent to $194 billion by the end of 2013, according to a new global study by Bank of New York Mellon/Casey Quirk.

The study entitled 'The Hedge Fund of Tomorrow: Building an Enduring Firm,' also highlighted the role of oil prices and high net worth investors in the continued growth in hedge fund investment across the Middle East region.

The Middle East has not been a major source of outflows over 2008-2009, accounting for less than 3 per cent of total global outflows, said the study based on interviews with over 150 institutional investors, consultants, hedge funds and experts around the world.

The future flows will come primarily from high-net-worth segments. The majority of flows for 2010-2013 from the Middle East will come from high-net-worth (HNW) investors, primarily family offices.

Redemptions were concentrated in the high-net-worth segments, both family offices and bank platforms, it added.

With in four years, the Middle East investors will account for about 7.5 per cent of total global hedge fund assets, the study pointed out.

However, the The Bank of New York Mellon cautioned that both institutional and individual investors in the Middle East were highly susceptible to oil prices, and therefore future hedge fund investments could vary widely.

The study estimated substantially different outcomes in “Bull” and “Bear” scenarios. 'The total 2013 hedge fund assets in our “Bull” scenario are more than 65 per cent larger than under the “Bear” scenario.'

In aggregate, the Middle East has preferred to invest directly rather than by using funds of hedge funds. The concentration of institutional assets among a few large sovereign funds, and HNW assets among a select group of large family offices, facilitates direct investments, the study said.

Looking at the global picture, hedge fund assets will bottom out at roughly $1 trillion in 2009, after which capital appreciation and $800 billion in net inflows over the next four years will push global levels to $2.6 trillion by 2013, the study stated.

It found that institutions remain firmly committed to hedge fund investing, with institutional investors comprising less than 20 per cent of hedge fund redemptions in 2008-2009.

The global HNW investors could account for as much as 60 per cent of new net flows for the period 2010-2013, although their return to hedge fund strategies will rely on capital market conditions and hedge fund performance, it said.

According to the study, the hedge fund industry is facing a “transformational crisis” and must address key shortcomings in its business and operating models.

As a result, hedge funds will rely more on third parties for a growing range of administrative support. Fund administrators will play a greater role in hedge funds’ operations, which will require stronger integration of hedge fund servicing activity with traditional custody and cash platforms.

Hani Kablawi, head of Middle East & Africa at The Bank of New York Mellon, said: 'While we have produced two previous studies on this topic, this is the first time we have been able to include some sizeable Middle East institutional and high net worth investors among the respondents.'

'It is clear their perspective diverges materially from the wider consensus in key areas, and as such their contribution offers a valuable insight into the preferences, appetite for risk and investment criteria of hedge fund investors within our region,' he added.

David Aldrich, managing director, Alternative Investment Services at The Bank of New York Mellon, commented: “The events of 2008 have changed the old dynamic. Investor and regulatory demands for new levels of transparency mean the legacy operating model no longer works.'

'Hedge funds increasingly will turn to independent third parties for middle- and back-office functions such as portfolio accounting and reconciliation, custody of non-collateral assets, pricing and valuation, cash management, and counter-party risk-mitigation.  Allowing third parties to play a bigger role in their business will be a sign the hedge fund industry is maturing,” he observed.

Kevin Quirk, a partner with Casey Quirk, pointed out that enduring hedge fund management firms will more closely align their business models with investor needs for transparency and liquidity.

'This means new fee models and longer-term incentive structures. By striking better-designed balances, they will come to define the central value proposition of active asset management,” he remarked.-TradeArabia News Service