GCC investors eye alternatives to spread risk
Dubai, July 1, 2009
Regional investors are showing renewed interest in alternative investments as the severity of the recent economic downturn has once again underpinned the need for diversification across multiple asset classes, says a study.
The study by Man Investments, an independent leader in alternative investments, says that the downturn, which started as difficulties began to emerge in the over-borrowed US housing market in 2007, weighed on equity markets across the GCC states throughout 2008.
Events came to a head in September as the failure of several high profile institutions raised concern over a global economic recession, triggering a massive drop in world trade. In this environment oil plunged from a peak of $147/barrel to just $32/barrel in February, weighing heavily on GCC stocks.
The Bloomberg GCC 200 index fell 63.5 per cent from a January 2008 peak of 108.7 to a recent low of 39.7 in March 2009, though it was trading about 25 per cent higher by the end of June.
As extreme as these losses were, the outlook for the region remains remarkably positive as most GCC states have strong balance sheets and were already committed to significant internal infrastructure expenditure which will stimulate growth.
Furthermore, oil prices are likely to trend higher ahead of a global recovery and, at around $70/barrel, are already helping to lift the GCC out of its slump.
A recent study by Mercer consulting showed that 73 per cent of companies in the GCC believe they will deliver growth in 2009 despite the downturn, while the IMF predicts the region’s economies will grow around 5.1 per cent in the year, below trend but still impressive considering the recent downturn.
That presents two key issues for Arab investors. Despite the positive growth outlook, the region remains relatively volatile with a high dependency on oil. A slight more counter-intuitive concern is that as local markets outstrip their peers in developed economies, Arab investors will be faced with a growing allocation mismatch as wealth invested locally growths at a faster rate than those in international markets.
There is strong anecdotal evidence that institutional investors in the GCC state are increasingly seeking to address this asset allocation mismatch by allocating to alternatives.
This is supported by a substantial body of research, including reports from consultants Casey Quirk, State Street and Deutsche Bank that show a growing appetite among institutions for alternative investments like hedge funds to spread their investment risk.
The decision to invest in alternatives is not without difficulties, however. Hedge funds, for example, also had a difficult year in 2008 as a shortage of liquidity forced many funds to sell assets at a discount and unveiled serious operational and reporting issues at a handful of managers.
This has not only hurt the image of the industry, but is likely to lead to stricter regulation and is driving calls from investors for greater transparency and accountability.
The down-turn in 2008 may have hurt hedge fund performance in the short-term, but it has also removed many of the weaker players, not to mention the proprietary trading desks of the now-defunct investment banks, from the market.
That has left an exciting competitive environment for hedge fund players but has also raised several concerns among investors who increasingly require:
• Independent custody
• Independent valuation service providers
• Independent administrators
• Better operational control, particularly with regard to the management of counterparty relationships, credit facilities, leverage and liquidity
• Transparency into the investment process so investors can quantify their exposure to certain categories of risk across their entire portfolio
• Improved risk management, with