x Abu Dhabi, UAESunday 21 January 2018

Contrarian Batt looks to Iraq for investment

As a young philosophy student he met Daniel Cloud, the famed emerging markets investor, and was inspired to set up his own fund to invest in Iraq.

Ealier this month, Geoffrey Batt launched the US$5 million Euphrates Iraq Fund to invest in Iraqi stocks.
Ealier this month, Geoffrey Batt launched the US$5 million Euphrates Iraq Fund to invest in Iraqi stocks.

As a young student at Columbia University in New York, Geoffrey Batt thought he had his future mapped out: after finishing his undergraduate programme, he would enter a PhD programme and eventually teach philosophy.

Then he met an older student who not only upended his career plans but introduced him to the idea that investing could be as intellectually rewarding as pondering passages by Bertrand Russell. That introduction would eventually lead to the creation of one of the first funds to invest in the Iraqi stock market.

"It is fair to say investing is the very last thing I contemplated when I entered college," says Mr Batt, 32. "I was too immersed in philosophy to notice much of anything in the outside world."

That older student turned out to be Daniel Cloud, the founder of the famed Firebird hedge fund that invested in Russia after the fall of the Soviet Union. After making his fortune, Mr Cloud decided to focus on studying his true love: philosophy.

He convinced the young student to rethink his views on the role of capitalism in the world and leave school for a year to join him at a new fund called Quantrarian Capital Management, which was investing in emerging Asian markets.

Mr Batt learnt the "contrarian" investment strategy Mr Cloud had based his career on: look at information provided by others and detect mistaken assumptions that can be used to your advantage.

When he left Columbia in 2007 - he started his studies at the age of 24 - the financial world was in the midst of one of its largest catastrophes. Mr Batt, dismayed at the state of the developed markets, decided to look further afield. His gaze focused on Iraq.

"I decided I needed to find something that was completely under the radar, deeply contrarian and that no one was involved in yet," he says. "I saw an article at the time about oil production steadily increasing. As I looked into it more, I saw violence was declining. Inflation was down. Customer deposits in Iraq banks had been growing."

In January 2008, he began investing his own money in the Iraqi stock market from an office in New York. His portfolio expanded to include three accounts with fund managers curious about the market there. Earlier this month, he launched the US$5 million (Dh18.3m) Euphrates Iraq Fund to invest in Iraqi stocks. The plan is to build up positions across the market and hold on to them for more than three years until "the perception of Iraq converges more with the reality of Iraq". That moment, he says, is likely to result in a substantial increase in asset prices.

Mr Batt has noted so far that volumes of trading on the Iraq Stock Exchange have been correlated strongly with political uncertainty. Last year, after the transition from white boards to an electronic trading system, volumes were regularly hitting $2m a day compared to $700,000 when he first started out.

In pitching would-be investors, Mr Batt argues Iraq is one of the few real emerging markets available in the world today.

"This is what an emerging market used to be called in the 1970s, not the markets people label as emerging like Brazil and Russia, which are really quasi-developed," he says. "When you invest in Iraq you are giving yourself exposure to a market that is essentially untouched."

One of the major investors in his fund is Mr Cloud, who is now a professor at Princeton University.

Using his interest in philosophy, he crafted a strategy of always questioning the arguments that are driving investment in a market and taking positions that exploited mistaken assumptions.

When he and Mr Batt were studying Iraq, they did so from the perspective of "Martians" to avoid the bias of Americans whose troops are involved in a protracted war.

"When you do that, Iraq starts to look like it will do pretty well," Mr Cloud says. "I actually felt the political situation was a bit safer than Russia in the 1990s."

Philosophers are naturally predisposed toward investing, Mr Cloud says, adding that innovations in capital markets occurred alongside a flourishing discipline of philosophy in 4th century BC Athens.

"It's basically the same set of intellectual activities," he says. "It's about taking information given to you by other people, turning it over from every possible angle and figuring out what is wrong with it."