Hedge funds in Mena: bigger than thought

Date: Thursday, July 7, 2011
Author: James Drummond, Financial Times

As much as $10bn was invested in hedge funds focused on the Middle East and north Africa before the 2008 financial crash, says a report by Hedgefund.net, a US-based research house.

The downturn caused a dramatic outflow as investors took fright. Assets under management reached a low of under $4bn in the first quarter of 2009 and are now only slightly greater. Yet $4bn is much more than most estimates of hedge fund assets in the region.

Peter Laurelli of Hedgefund.net says his database contains 26 unique and active Mena-focused funds. Average asset size is roughly $100m, he says. The preferred strategy is long-short equity.

Some of the funds include assets focused on Israel, and one specialises in Turkey, but if anything the assets estimates are an underestimate, he says. This is because Hedgefund.net has excluded generalised emerging or frontier market funds that may invest in Mena. Sixteen of the funds are based in the United Arab Emirates and most of the rest in London.

“Broadly, we believe we have about 50-60 per cent of the funds in existence reporting to our database, which implies there may be 40 to 45 unique funds out there which invest primarily in Mena,” he says.

Hedge funds are typically able to short stocks – that is, bet that the shares will go down in value – and are usually mandated by investors to borrow, sometimes heavily, to boost returns. Their activities vary from long-short equity investing, to fixed income, arbitrage – taking advantage of short-term price differences – to special situations.

In the Middle East they were thought to be a relatively rare phenomenon because of the under-development of capital markets and the dominating role of governments in many economies.

Khalid Abdel Majeed of Mena Capital, a London-based hedge fund, says long-short equity is the only realistic option: “The equity market is still far more liquid than the fixed-income market – but that is changing.”

Performances vary widely. According to Bloomberg, Blackrock’s Mena Opps is up 19.3 per cent since 2007, while Abdel Majeed’s Mena Admiral Fund has returned 36.7 per cent since 2006. But Riyadh-based Ajeej’s Mena Fund is off 10.8 per cent since 2007 and EFG-Hermes’ Mena Opportunities fund is down 40.6 per cent in roughly the same period.

By way of (rough) comparison, MSCI’s benchmark Arabian markets excluding Saudi Arabia is off by 20 per cent in the three years to July 5.

Unsurprisingly, investors have been spooked by the unrest that has spread across the Arab world. Hedgefund.net says “redemptions from Mena-focused strategies accelerated in March and peaked in April 2011”.

Abdel Majeed says now is not the time for haste. “To my mind it is not a time to be a hero, certainly not on the upside or even on the downside. In quite a few countries you have got a lot of pent-up frustration and it spills over because of a spark. No one can identify what that spark will be.”