x Abu Dhabi, UAETuesday 16 January 2018

Hedge funds face redemption day

On Tuesday investors could either take their money out or wait another 90 days for their next opportunity.

With financial markets engulfed in their harshest storm since the Great Depression, yesterday was redemption day for hedge funds - the day that investors could either take their money out or wait another 90 days for their next opportunity. The HFRX Investible Global Hedge Fund Index is down 9.8 per cent to Sept 24 and the losses continue adding up, with the possibility that the worst is yet to come. The US government's US$700 billion (Dh2.57 trillion) bailout package, which was meant to provide relief to a pained financial system, has not yet been passed; investors who were once simply cautious may now have difficulty fighting the temptation to get their hands on their cash. The hedge fund industry, which has nearly tripled in size in the past six years to include pension funds and foundations, is not sheltered from the storm. Some 350 hedge funds have already been liquidated in the first two quarters of this year with the average fund down nearly 10 per cent, according to Hedge Fund Research, a consultancy. Although September returns are expected to be the worst of the entire summer, some argue that alternative investments will have to fill the void left by defunct Wall Street investment banks. "We are in the midst of a severe financial crisis and there may not be investment banks going forward, but retail investors still need to invest their money somewhere; hedge funds can fill part of that void and attract the funds that investors are now pulling out [of]," said Patrick Merville, the newly appointed regional chief executive of Man Investments, a hedge fund. Shariah Capital recently announced that it would invest $150 million in three hedge funds, together with the Dubai Government. The funds will adopt Shariah-compliant strategies, and are thought to be the first Islamic hedge funds. "We want to make it clear that we're investing in capital markets," Eric Meyer, the president and chief executive of Shariah Capital, was reported saying. "We're trying to look a bit longer term." For most hedge funds at the moment, long term is looking beyond tomorrow. However, Man Investments, which has been operating for more than 200 years and began to focus primarily on hedge fund activity 25 years ago, also said it was in for the long term. It has had a hub in the Middle East for 22 years as the region's capital markets matured and grew deeper. Mr Merville conceded that the Middle East had not been completely sheltered from financial turmoil abroad. "I'm not a proponent of the decoupling concept; we are not immune in the Middle East from what's happening abroad, and it's clear that investor confidence is shaken, so it's natural human behaviour to be cautious about investments and rethink strategy." Interest in hedge funds has risen in the Middle East and Mr Merville's team has seen a trend in regional interest in commodities hedge funds and distressed securities, which are investments made in companies filing for bankruptcy protection that are often viewed as a bargain. Man Investments also successfully launched a $1.5bn environmentally friendly hedge fund in June in conjunction with the Abu Dhabi Government-owned International Petroleum Investment Company. As the global hedge fund industry teeters, Mr Merville said the Middle East and North Africa region would show increased hedge fund activity, since the region's economies were on a separate growth cycle from the West. "In my three years in the Gulf, there's been a change in perception and comfort with the hedge fund business which will continue, as we've experienced big movements in traditional equity markets," Mr Merville said. It is a difficult time to stay optimistic. A pre-close trading update issued by Man Investments on Sept 29 said that "negative investment movement has reduced funds under management in the period by $5bn", down to $70.3bn to the end of September - a 12 per cent decrease from figures at the end of June, according to Peter Clarke, the chief executive of Man Group. "When you go through times like these, the first reaction is to pull back... which is normal and expected; although the funds have shown negative performance, we've had sales of $10bn in the past six months with redemptions of $5.9bn, so our sales are still increasing despite the financial turmoil," said Mr Merville. Shares of Man Group, which is listed on the London Stock Exchange, lost 32 per cent of their value in the past month and plummeted 18 per cent on Monday to £314.25 (Dh2,043). Global bans on short selling, which is employed as a standard hedge-fund strategy in order to profit from an expected drop in share prices, have made it that much more difficult to operate during troubled times. "As a firm, we are against the ban on short selling; it is healthy for the market, provides needed liquidity and prohibits asset bubbles from blowing up - but we understand that these are extraordinary times that call for extraordinary measures," said Mr Merville. He added that the Security and Exchange Commission's decision to repeal the uptick rule in short selling - where one can only short sell when a stock has gone up - had hurt the market. The short-selling ban on 800 financial companies is due to be lifted in the US tomorrow. Investors the world over are braced for the aftermath, although analysts believe the ban could be extended. Short selling has always been illegal in the UAE, because no regulatory framework is in place as a guide, although a derivatives framework is set to be finalised by local exchanges in December. "When we have a new rule instituted regarding local short selling we will go through growing pains, but it is necessary to have a structure in place for a complete market," Mr Merville said. "When you go through these bear markets and cycles, you realise it's part of the business and you have to go through it and learn from the experience." shamdan@thenational.ae