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Sun 1 Apr 2007 03:47 PM

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Volatility and stability?

As DIFC aims to become a hub for hedge funds, regional investors need to understand them better.

The Middle East is growing in importance for the hedge funds industry, as evidenced by last month's Hedge Funds World conference, but more needs to be done to educate investors and improve the regulatory environment, according to leaders in the field.

Alexander Lowe, CEO of Man Global Strategies, the product development engine of Man Investments, said that it was unfair to describe hedge funds as a risky investment, and said that such a perception might deter some investors from diversifying their portfolios.

"Certainly fund of funds are not a volatile asset class generally," he said. "Indices data is showing about 4% as a classic measure. That's probably somewhere in line with US government bond index volatility.

"I often find it mildly irritating that they have this perception, because actually one of the things I feel very strongly about is that we should be delivering more risk for the investors, clearly with an enhanced return, because as long as that risk is uncorrelated - and I believe over the longer and medium term it is - then actually that volatility is an important diversification tool."

He added that investor education was crucial, since investors who did not have a clear understanding of what constituted a healthy range of movement in their hedge funds would be more likely to redeem them.

Since hedge fund firm Amaranth collapsed in September 2006 after making a disastrous play on natural gas futures, Lowe believes that multi-managed funds are becoming more attractive in some markets. Man works with regulators to ensure that the asset class develops in a healthy, transparent way, even though industry observers have often criticised hedge funds for a lack of regulation.

"There are a large number of counter parties to hedge funds that are themselves heavily regulated," Lowe pointed out. "Actually, one effective way of gaining some comfort is to make sure that the counterparties themselves have that transparency and that they risk monitor."

A spokesperson for Dubai International Financial Centre (DIFC) said that the growing size of hedge funds and the potential effects of their investment strategies on the GCC markets needed to be closely watched.

"It's a concern because they are smaller markets and less liquid. It's all the more reason to have good regulation," he said.

The DIFC's Collective Investment Law 2006, which allows 100% foreign-owned firms to be based there and benefit from a zero tax rate on profits with no restrictions on repatriation of capital, has made the financial centre an attractive base for the establishment and management of funds. However, in addition to attracting firms, the centre needs to ensure they can be properly regulated.

Sandy Shipton, executive director, asset management, DIFC, said: "We had to have rules and regulations that made sense to this industry, which is the most sophisticated asset class without a doubt." DIFC has the aim of housing end-to-end services for hedge funds, including custodian work, fund administration and registration.

"The hedge fund industry is fragmented," said Shipton. "We have the objective of bringing together this business."

He added that the DIFC aimed to have a "light touch" regulatory regime closer to the English system than the US system. By the end of the year, there are expected to be three hedge funds registered at the DIFC.

If the centre's end-to-end offering is successful in drawing international funds there, and if regional investors understand the risks and returns of hedge funds, it is likely that other parts of the Middle East will follow.

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