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Fresh wave of hedge funds poised to tap UAE

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Abu Dhabi and Dubai are the new hedge fund hotspots
  • US, UK and Hong Kong managers move portfolios to region
  • Lifestyle and tax rates are influencing factors
  • Hedge funds used to working from around the world post-Covid 

The UAE is fast becoming a magnet for overseas hedge funds seeking a low-cost, investor-friendly base amid Brexit, the Ukraine crisis, and changes in working patterns brought about by the coronavirus pandemic. 

A clutch of hedge funds from the UK and US have set up or expanded operations in Dubai or Abu Dhabi in the past two years – among them, New York-headquartered Millennium Management and London-based Florin Court Capital. 

AGBI understands a slew of others are awaiting regulatory approval to set up shop in the UAE’s financial hubs.

“We have seen a rise in hedge fund managers from the US, Hong Kong and UK in particular,” said Muneer Khan, partner and Middle East regional head of law firm Simmons & Simmons, who has advised hedge fund managers on setting up and operating in the Middle East.

“A number of these are in the process of applying for licensing so cannot be named.”

“There has definitely been a pick-up in hedge funds moving portfolio managers to the region, and I know of other hedge funds looking at setting up in the next few months as they have reached out to me for advice,” added David Denison, deputy chief information officer at Florin Court Capital, which has established a trading, research and operations hub in financial free zone Abu Dhabi Global Market (ADGM), as part of a deal with Abu Dhabi Investment Office last year.

Among the firms awaiting approval is London hedge fund Carrhae Capital, AGBI understands. A spokeswoman declined to comment.

Hong Kong-based ARCM and UK-based Brevan Howard are understood to be two others. Neither responded to requests for comment. 

Political unrest in Hong Kong, the UK’s exit from the European Union, high global interest rates and economic uncertainty since Russia’s invasion of Ukraine are underlying drivers for hedge funds seeking an alternative base from which to tap emerging markets in Asia and the Middle East, according to sources. 

However, there are multiple “pull” factors specific to the UAE, noted Simmons & Simmons’s Khan. 

“Talent acquisition, in particular portfolio managers wanting to work in Dubai; talent retention such as portfolio managers wanting to move to Dubai from other locations; a favourable tax framework, especially as taxes are rising in other locations; a developed common law legal and regulatory system; international connectivity; the UAE’s attractiveness to highly skilled and experienced financial services specialists, especially through the new Golden Visa scheme; and its response to Covid – it remained open for business throughout the pandemic,” he said. 

Dubai International Financial Centre (DIFC) in particular “is fast becoming a hub for alternative asset managers”, according to Khan. “The common law legal system is familiar to hedge fund managers from the US, UK and Hong Kong,” he said.

Brexit may have been “a factor”, he added. “But the pandemic acted as more of an accelerator.”

For Florin Court’s Denison, lifestyle is a key driver for hedge funds moving to the UAE.

“I don’t believe Brexit is a factor at all,” he said. “We have seen something similar with the move of hedge fund staff from New York to Miami: sunshine, lifestyle and more favourable tax rates are influencing factors. 

“I think moving to the UAE has much more to do with the transformation of the workplace after Covid. Hedge funds got used to working from around the world and continuing to interact from disparate locations.

“Once you have done this for a year, you know what is possible and feel freer to live in a location you enjoy, that has a high quality of life and a convenient time zone.”

Many asset management businesses in the UAE consist primarily of marketing and client management functions, while investment decisions continue to be made in the traditional financial centres of London and New York. 

But this is not the case with Florin Court, Denison said. “We are not merely a sales office – we have all the functions here [in Abu Dhabi].

“Two of the three partners are residents and we have technology, trading and operations staff permanently based here – 40 percent of the company (eight employees).

“We are now in a position where future growth can either be in London or Abu Dhabi, depending on where we source the correct candidate and their wishes.” 

Crucially, said Denison, the UAE’s financial regulators are “quicker to respond and easier to get information from than those we have dealt with elsewhere”.  

Dubai offers asset managers such as hedge funds an array of incentives, including reduced licensing fees and capital requirements. 

A team from DIFC this year completed a roadshow in San Francisco and New York to attract more such firms, and the Dubai Financial Services Authority is drawing up a scheme to encourage fund managers to set up larger operations to tap into the region’s substantial wealth as oil prices hover above $100 a barrel. 

The UAE is expected to attract a net inflow of 4,000 millionaires this year, the most of any country globally, according to consultancy Henley & Partners. 

Meanwhile, global demand for private and alternative assets is on the rise, and the region’s institutional investors are increasing their exposure to overseas funds. 

“The DFSA continues to enhance its funds regime to address market developments and facilitate the carrying out of funds business in or from the DIFC, the region’s leading fund venue. This includes introducing a new regime for credit funds,” a DFSA spokesperson said. 

“The DFSA has seen a significant increase in hedge funds wanting to set up in the DIFC since late last year, many of these are firms with UK connections.”

Nor is the UAE facing much competition from elsewhere in the Gulf. 

“Saudi Arabia is developing its financial services sector, but this seems to be more focused on the domestic Saudi market than operating as a hub for the wider region,” Khan said.

“I think hedge funds will continue to come and grow [in the UAE], undertaking not just marketing and capital raising, but also portfolio management and ultimately domiciling funds here too.”

BNY Mellon, one of the world’s largest financial institutions, and Dubai lender Emirates NBD agreed a partnership this month aimed at accelerating the growth of the UAE’s capital markets, which involves BNY expanding its regional offering to clients. 

The deal is the latest example of a large overseas asset manager coming to the UAE to take advantage of its capital markets regime. 

AIMA, the UK’s association for hedge funds and other alternative investment managers counts 30 firms in the MENA region as part of its 2,100-strong global membership base. 

Tom Kehoe, AIMA’s global head of research and communications, said: “[We have] a vibrant network of fund members in the Gulf and MENA region including managers and service providers. 

“AIMA recognises the growing interest in the region as the alternative investment industry becomes more global, including managers, institutional allocators and fund service providers opening new hubs in the region.”

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