After the global financial crisis of 2008 and early last year, the hedge fund industry has regained some of its self-assurance, and investor sentiment has improved.
As we pause to take a breath and draw a few lessons, what trends have emerged? Two dynamics are clear, although one seems permanent and the other more temporary.
First, the industry has grown much more institutional in nature. After a handful of well publicised frauds, the employment of a third-party fund administrator for valuation and position verification is becoming the norm.
It is clear that there is no substitute for a credible fund auditor, a realisation that came too late for some. And, strong risk reporting by funds is now a must, not an option, with investors eager to take stock of their portfolios in increasingly sophisticated ways.
The hedge fund industry and its regulators have also made significant headway on standardising hedge fund due diligence processes and helping industry participants speak a shared vernacular. The US government, for instance, has worked with the industry over the past two years to establish hedge fund investor due diligence best practices, while the UK authorities have recently surveyed hedge fund managers in an effort to develop meaningful risk measures.
Although this institutionalisation is predictable and healthy, other trends are troubling.
One of those is the current rush into hedge fund products permitting frequent, potentially heavy withdrawals of investor capital.
Investors should not confuse "liquidity" with "safety". Historically, hedge funds have been considered valuable for their potential diversification and return-enhancing characteristics and not as quick and easy sources of liquidity.
Some 2008 fund losses were exacerbated by heavy transaction costs stemming from too much, rather than too little, investor access to capital relative to funds' underlying portfolios.
This recent emphasis on full, penalty-free investor withdrawal rights each quarter, month, or even week is worrisome.
Overly permissive fund withdrawal provisions can constrain portfolio management in counterproductive ways under normal conditions and, in a future crisis, may spell real trouble for individual funds or the larger system.
A frequent - and correct - argument is that the ability of a fund investor to withdraw his capital should correspond to the liquidity of the fund's underlying portfolio.
However, it is important to note that this matching of assets (the fund's holdings) and liabilities (the potential payables to creditors and withdrawing investors) must work both in normal trading periods and during market catastrophes.
Unfortunately, history shows that as the severity of a financial crisis grows, investment positions become harder to exit while demands for capital from lenders and departing investors intensify. Liquidity-focused hedge funds are often forced to hunt for opportunities in the same limited universe of heavily traded investments in order to meet potential withdrawal demands.
As a result, they are more likely to hold common investment positions, which can make them more prone to a vicious cycle if some of those funds are forced to sell out of positions in a crisis.
Furthermore, very liquid funds using leverage may suffer from more precarious financing arrangements because their lenders view their less stable capital base as less creditworthy.
This in turn increases the likelihood of a fund failure during stress periods, an often overlooked connection between an investment vehicle's equity and debt funding.
A hallmark of rigorous risk management is preparation for worst-case scenarios.
Shipwrights build vessels to withstand extreme weather because the alternative is unacceptable. Fund managers and investors can similarly increase their chances of successfully passing through the next financial storm by agreeing on some reasonable constraints on capital outflows from the funds they manage or invest in.
Some assume that permissive liquidity is a cost-less feature of an investment product. This is far from true.
Hedge fund managers have correctly adapted their business models to take into account some of the secular shifts that are already under way.
At the same time, though, many are earnestly trying not to overreact to what may be more transient changes in industry sentiment, such as the recent emphasis on liquidity at the expense of other equally important considerations.
Over time, investors tend to gravitate towards strategies that demonstrate tangible portfolio benefits. For many hedge fund approaches, that added value takes the form of attractive risk-adjusted returns that have modest long-term correlations with equity or credit market fluctuations.
There is no perfect investment solution, and hedge funds are no exception to this truth. After all, in 2008, only a handful of investment approaches produced positive returns, and those strategies will not necessarily work in future market environments.
The reason "diversification is the only free lunch" has become a cliche, however, is that it is true. Many investors were initially disappointed with the absolute performance of alternative investments during the credit crisis, but it is now clear that hedge funds were often meaningfully stabilising to investors' portfolios.
This was acutely the case in the Gulf region, where a "passive" investor in GCC equities was down almost 50 per cent across 2008 and 2009, despite last year's rebound. Contrast this with the modest 4 per cent loss achieved over that same two-year span (with far less volatility) by the average hedge fund (as broadly represented by the Credit Suisse-Tremont Hedge Fund Index), and the long-term power of diversification becomes clear.
Today, as investors in the region and elsewhere recover from their initial shock and take stock of their losses, they seem increasingly mindful of the benefits of positive, uncorrelated returns across long market cycles.
Hedge fund investors will rightly continue to demand robust institutional controls and infrastructure to protect their investments.
They also deserve investment terms that motivate their managers in healthy ways, that provide reasonable access to their capital in view of the objective of the fund, and that are honoured contractually and in spirit.
Hedge fund investors and practitioners mutually benefit when they also agree that attractive returns are most effectively and sustainably generated on a capital base that can remain stable during climates good and bad.
Trey Beck is a managing director of the DE Shaw group, which was founded in 1988 and manages approximately US$24 billion (Dh88.15bn) in investment and committed capital
RESULTS
1.45pm: Maiden Dh75,000 1,400m
Winner: Dirilis Ertugrul, Fabrice Veron (jockey), Ismail Mohammed (trainer)
2.15pm: Handicap Dh90,000 1,400m
Winner: Kidd Malibu, Sandro Paiva, Musabah Al Muhairi
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3.45pm: Maiden Dh75,000 1,600m
Winner: Rayig, Pat Dobbs, Doug Watson
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Winner: Chiefdom, Royston Ffrench, Salem bin Ghadayer
4.45pm: Handicap Dh80,000 1,800m
Winner: King’s Shadow, Richard Mullen, Satish Seemar
Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
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- An elevated football field that doubles as a helipad
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Euro 2020
Group A: Italy, Switzerland, Wales, Turkey
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Group C: Netherlands, Ukraine, Austria,
Georgia/Kosovo/Belarus/North Macedonia
Group D: England, Croatia, Czech Republic,
Scotland/Israel/Norway/Serbia
Group E: Spain, Poland, Sweden,
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Group F: Germany, France, Portugal,
Iceland/Romania/Bulgaria/Hungary
THE LIGHT
Director: Tom Tykwer
Starring: Tala Al Deen, Nicolette Krebitz, Lars Eidinger
Rating: 3/5
The White Lotus: Season three
Creator: Mike White
Starring: Walton Goggins, Jason Isaacs, Natasha Rothwell
Rating: 4.5/5
NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
Election pledges on migration
CDU: "Now is the time to control the German borders and enforce strict border rejections"
SPD: "Border closures and blanket rejections at internal borders contradict the spirit of a common area of freedom"
In numbers: PKK’s money network in Europe
Germany: PKK collectors typically bring in $18 million in cash a year – amount has trebled since 2010
Revolutionary tax: Investigators say about $2 million a year raised from ‘tax collection’ around Marseille
Extortion: Gunman convicted in 2023 of demanding $10,000 from Kurdish businessman in Stockholm
Drug trade: PKK income claimed by Turkish anti-drugs force in 2024 to be as high as $500 million a year
Denmark: PKK one of two terrorist groups along with Iranian separatists ASMLA to raise “two-digit million amounts”
Contributions: Hundreds of euros expected from typical Kurdish families and thousands from business owners
TV channel: Kurdish Roj TV accounts frozen and went bankrupt after Denmark fined it more than $1 million over PKK links in 2013
'The Ice Road'
Director: Jonathan Hensleigh
Stars: Liam Neeson, Amber Midthunder, Laurence Fishburne
2/5
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
UAE currency: the story behind the money in your pockets
THE SPECS
Engine: 1.5-litre, four-cylinder turbo
Transmission: seven-speed dual clutch automatic
Power: 169bhp
Torque: 250Nm
Price: Dh54,500
On sale: now
Wicked
Director: Jon M Chu
Stars: Cynthia Erivo, Ariana Grande, Jonathan Bailey
2025 Fifa Club World Cup groups
Group A: Palmeiras, Porto, Al Ahly, Inter Miami.
Group B: Paris Saint-Germain, Atletico Madrid, Botafogo, Seattle.
Group C: Bayern Munich, Auckland City, Boca Juniors, Benfica.
Group D: Flamengo, ES Tunis, Chelsea, (Leon banned).
Group E: River Plate, Urawa, Monterrey, Inter Milan.
Group F: Fluminense, Borussia Dortmund, Ulsan, Mamelodi Sundowns.
Group G: Manchester City, Wydad, Al Ain, Juventus.
Group H: Real Madrid, Al Hilal, Pachuca, Salzburg.
UAE currency: the story behind the money in your pockets
Killing of Qassem Suleimani
Director: Laxman Utekar
Cast: Vicky Kaushal, Akshaye Khanna, Diana Penty, Vineet Kumar Singh, Rashmika Mandanna
Rating: 1/5
How to turn your property into a holiday home
- Ensure decoration and styling – and portal photography – quality is high to achieve maximum rates.
- Research equivalent Airbnb homes in your location to ensure competitiveness.
- Post on all relevant platforms to reach the widest audience; whether you let personally or via an agency know your potential guest profile – aiming for the wrong demographic may leave your property empty.
- Factor in costs when working out if holiday letting is beneficial. The annual DCTM fee runs from Dh370 for a one-bedroom flat to Dh1,200. Tourism tax is Dh10-15 per bedroom, per night.
- Check your management company has a physical office, a valid DTCM licence and is licencing your property and paying tourism taxes. For transparency, regularly view your booking calendar.
Skewed figures
In the village of Mevagissey in southwest England the housing stock has doubled in the last century while the number of residents is half the historic high. The village's Neighbourhood Development Plan states that 26% of homes are holiday retreats. Prices are high, averaging around £300,000, £50,000 more than the Cornish average of £250,000. The local average wage is £15,458.
COMPANY PROFILE
Name: Kumulus Water
Started: 2021
Founders: Iheb Triki and Mohamed Ali Abid
Based: Tunisia
Sector: Water technology
Number of staff: 22
Investment raised: $4 million
ARSENAL IN 1977
Feb 05 Arsenal 0-0 Sunderland
Feb 12 Manchester City 1-0 Arsenal
Feb 15 Middlesbrough 3-0 Arsenal
Feb 19 Arsenal 2-3 West Ham
Feb 26 Middlesbrough 4-1 Arsenal (FA Cup)
Mar 01 Everton 2-1 Arsenal
Mar 05 Arsenal 1-4 ipswich
March 08 Arsenal 1-2 West Brom
Mar 12 QPR 2-1 Arsenal
Mar 23 Stoke 1-1 Arsenal
Apr 02 Arsenal 3-0 Leicester
Test
Director: S Sashikanth
Cast: Nayanthara, Siddharth, Meera Jasmine, R Madhavan
Star rating: 2/5
MATCH INFO
Inter Milan v Juventus
Saturday, 10.45pm (UAE)
Watch the match on BeIN Sports
Neymar's bio
Total club appearances 411
Total goals scored 241
Appearances for Barca 186
Goals scored for Barca 105
Killing of Qassem Suleimani
