The Dubai Financial Services Authority (DFSA) is awaiting reaction to its draft hedge fund code. The code, which was issued for public consultation at the beginning of July, is a non-binding set of rules that will establish best practice principles for hedge fund participants in the Dubai International Financial Centre (DIFC).
It supplements the collective investment trust regulations that were implemented in April 2006, and is the only separate set of best practice principles issued by the DFSA, an indication of the importance attached to developing a hedge fund business.
The DIFC is not alone in the region in recognising the potential of the alternative asset class, characterised by a high-risk investment strategy that uses leverage, long, short and derivative positions. The Central Bank of Bahrain has issued collective investment regulations that actually allow for exempt funds, such as hedge funds, to cater to sophisticated investors.
'Hedge funds are an attractive asset class to operate from the centre,' says Ian Johnston, managing director, policy and legal services at DFSA. 'A code in respect of hedge funds is useful. Hedge funds pose specific risks and there is a great deal of talk about how funds should behave.'
But the DIFC faces significant challenges in expanding the number of hedge funds domiciled in the centre, from the current two.
'It is still a case of people being more comfortable with global hedge funds than with the funds in the DIFC,' says Abdulkadir Hussain, chief executive officer of Mashreq Capital. 'For investors in the region, the first place they go is a global investment bank.'
In March, Mashreq launched the Emerging Market Credit Opportunity Fund, a fixed-income hedge fund based in the DIFC that invests globally in bonds on behalf of its institutional and high net worth clients. The other DIFC fund is Constans Crescent Investment Fund, run by Argent Financial Group International.
There is an appetite among regional investors for hedge funds. 'There is a lot of money from the Gulf, the Middle East and North Africa invested in hedge funds,' says Russell Hendry, fund manager at London-based Mena Capital.
However, investors are less concerned by the location of the fund manager than by who they are. 'People do not care about the jurisdiction as much as they care about the operator,' says Hussain. 'If the big institutions come in, they will give the DIFC legitimacy and move it in the right direction.'
An obstacle for global investment banks, such as Merrill Lynch and Goldman Sachs, establishing hedge funds in the DIFC is the requirement that all the hedge fund service providers be recognised by the DFSA. 'They want to build up a critical mass of fund management institutions. The requirement will fall away once it is in place,' says Hussain.
