Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Welcome to the podcast.
Speaker: My name is Terry Minke.
Speaker: and I head up HSBC's Prime Finance Origination Sales Team in Ape.
Speaker: I'm also the head of Prime Finance Capital Intelligence, which brings you this podcast.
Speaker: I'm joined today by my colleague and partner, Osman Rai, Head of Sovereign Wealth Fund Cross-Asset Institutional Sales in the Middle East and based in Dubai.
Speaker: I recently traveled to the Middle East region and Osman partnered with me on this trip where we met a number of hedge fund allocators to get a sense of the current sentiment towards hedge fund allocations, as well as hedge fund strategies that these allocators are thinking about.
Speaker: It was a great trip and very insightful.
Speaker: I think it will be helpful to start off by setting the scene for our listeners by giving them an overview of the allocator landscape in the Middle East.
Speaker: Could you also talk a little bit about how capital raising works in the region and how the various allocators operate?
Speaker: Hi Terry, it's a pleasure to join you today.
Speaker: The Middle East is being coined as the ATM of the world because of the sheer amount of wealth.
Speaker: Sovereign wealth funds in the GCC alone are estimated to be approximately 4.1 trillion US dollars and this is forecasted to hit 7.6 trillion by 2030.
Speaker: It's also probably worth noting that the pool of wealth outside the sovereigns also continues to grow and remains relatively untapped.
Speaker: Many of our listeners will probably be connected to the sovereign wealth funds as there have been active hedge fund investors for some time now.
Speaker: However, beyond the sovereigns, there is a vast pool of wealth through growing family office investors who vary in size and level of sophistication, but are increasingly keen to diversify their investments.
Speaker: Historically, families have mostly invested their wealth into real estate and private markets.
Speaker: But like many places in the world, there is a general shift happening in the Middle East.
Speaker: And these investors are becoming much more sophisticated and looking for diversification, as well as other alternative strategies, which is where hedge funds come in.
Speaker: In relation to how capital raising works in the region, firstly, high oil prices over the past three years have generated significant revenue generation for the region, which in turn, even with significant regional development plans, has created a capital deployment challenge in the region.
Speaker: However, despite the Middle East being coined as the ATM of the world because of the sheer amount of wealth of the region, gaining hedge fund allocation still remains challenging.
Speaker: Culturally, it's important for allocators to get to know the hedge funds and build a level of trust.
Speaker: And this can take many meetings, potentially over a long period of time.
Speaker: Having skim the game is sometimes seen as important.
Speaker: And what I mean by this is that allocators will sometimes like to see the fund manager making investments into the region or having an office in the region.
Speaker: Aside from the hedge fund strategies, private equity, private credit, real estate and venture capital continue to form investments.
Speaker: part of the diverse range of allocated strategies and there is a strong demand for local infrastructure investments.
Speaker: In terms of where the assets are located within the GCC, UAE remains the largest pool across both Dubai and Abu Dhabi.
Speaker: Abu Dhabi is the home to the largest sovereign wealth funds in the UAE, but Dubai has a larger concentration of private wealth.
Speaker: This is followed by Saudi Arabia, Kuwait, Qatar, and finally Oman.
Speaker: Each country operates slightly differently,
Speaker: Key themes remain important, including a cultural requirement to build trust, manager alignment, manager transparency, and fee structure.
Speaker: This increasingly helps get in the game in the Middle East.
Speaker: For example, having an office located in the region on investments into the region, be they are public or private.
Speaker: Building relationships with sovereigns is relatively straightforward.
Speaker: However, developing the same relationships in the region beyond the sovereigns can be challenging.
Speaker: Thank you for these insights, Osman.
Speaker: I completely agree.
Speaker: The feedback that we've been getting from clients is that most will have access to sovereigns and pensions, but access to other institutions and family offices across the region can be quite challenging.
Speaker: And this is where the allocator segment is getting more sophisticated in their allocation strategy.
Speaker: During our trip, Terry, we picked up some key allocator themes.
Speaker: Perhaps you can share some of these themes with our listeners.
Speaker: Absolutely.
Speaker: I think firstly, it was very clear from the meetings that we did that Middle East allocators are very sophisticated.
Speaker: All the allocators that we met across sovereigns, pensions, corporates and family offices all had very high quality investment teams with sophisticated asset allocation strategies that all contained hedge fund allocations.
Speaker: I would also say that hedge funds are seen as a core diversification strategy and that allocations are set to rise slightly and in line with the increase in wealth that's being generated in the Middle East.
Speaker: While home markets have a strong multi-year vision plan and remain very important, concentration risk also remains a concern and allocations into hedge funds definitely remain an important diversification strategy along with private equity, private credit, real estate and venture capital.
Speaker: The other thing I'd say is that hedge funds have continued to perform well for Middle East allocators, providing double-digit returns in 2023 and high single-digit or double-digit returns year-to-date in 2024.
Speaker: So as a result, hedge fund allocations are likely to rise for some allocators.
Speaker: However, seasoned hedge funds with track records continue to be in vogue.
Speaker: Global, large, well-known hedge funds form the core of Middle Eastern allocators' hedge fund strategies.
Speaker: However, allocators are also seeking medium-sized hedge funds with strong, stable track records.
Speaker: Multi-strat, market neutral, relative value, arbitrage and quant strategies have all been the most sought-after strategies this year.
Speaker: Unfortunately, for some startup hedge funds and smaller hedge funds, this means that raising capital from Middle Eastern allocators will remain challenging.
Speaker: However, there are a number of allocators willing to become early stage investors and or seed high quality hedge fund manager spin outs with strong track records.
Speaker: What about you, Osman?
Speaker: What did you pick up?
Speaker: Thanks, Terry.
Speaker: Actually, I'd like to add a few points.
Speaker: You mentioned track record, which is very important to some of those investors.
Speaker: What we're seeing is that very few Middle East allocators will seed startups.
Speaker: However, some are happy to invest day one.
Speaker: But generally, Middle East allocators tend to like to come in day two after extensive due diligence once a decent track record has been built.
Speaker: In addition, the majority of the allocators that we spoke to with conduct their due diligence in-house, meaning that they have extensive experience in identifying funds, but limited time in most cases to look at new fund launches.
Speaker: However, some allocators do outsource their due diligence to third parties to gain more capacity and detailed insights into investment managers.
Speaker: In regards to ticket sizes, they can be quite sizable actually, ranging from 20 million to more than say 400 million, depending on the size of the portfolio profile of the allocator.
Speaker: Some of the smaller family offices will write 1 million to 5 million tickets and scale up from there.
Speaker: Thank you, Osman.
Speaker: I'd like to pivot the conversation slightly to the APAC-MENAC corridor, which has been in the media a lot.
Speaker: HSBC's been at the forefront of the flow of business between both regions, and I'd like to get your thoughts on this.
Speaker: With such a deep historical presence and strong connectivity in both regions, it is natural for HSBC to play a leading role in the flow of business between APAC and the MENAC regions.
Speaker: It is predicted that by 2030, the combined assets of the Gulf Corporation Council, which is the GCC, sovereign wealth funds will hit 7.6 trillion, double that reported in September 2023.
Speaker: It is therefore only natural that we see a significant additional wealth generation outside of the sovereign wealth funds as well.
Speaker: However, it is important to remember that the business flows are two-way and that in relation to capital markets, there is a strong desire from Middle East exchanges to enhance their product offerings, boost liquidity, adopt new technologies that will attract market participants.
Speaker: We have already seen multiple MOUs being signed between Middle East and Asian exchanges.
Speaker: Several landmark ETFs issued and strategic investments made, such as the QIA, Qatar Investment Authority, taking a stake of 10% in a China asset management company.
Speaker: I fully expect this trend to continue, Terry.
Speaker: Thanks, Oz.
Speaker: So the key question is, of course, especially for our listeners in Asia, is all this activity translating to allocations into Asian hedge funds?
Speaker: The answer to that is that the flow of funds into Asian hedge funds from Middle Eastern allocators has been slow.
Speaker: Like many other regions, allocators are still underweight.
Speaker: China, for example, we know that the market has its challenges from geopolitical risks to the real estate sector, and that's led to poor stock market performance.
Speaker: But China is going through a structural reform.
Speaker: And as the second largest economy in the world, it is recognized that China really cannot be ignored.
Speaker: Most of the meaner sovereign wealth and family offices we spoke to
Speaker: have some form of allocation to China, albeit small in comparison to other allocations.
Speaker: The feeling was that interest in China is somewhat rising again, but the outlook is still cautious.
Speaker: As and when allocators get more bullish, they will seek the China specialists that have weathered the storm and can prove through their track record that they navigated the market well over the last two to three years.
Speaker: I think that if you have the track record, clear differentiator, or you're active in the strategy allocators are looking for,
Speaker: And you should be in good shape to have at least some productive conversations.
Speaker: Unfortunately, in Asia over the past few years, I think the challenges in China have caused allocators in some cases to be a little bit wary of Pan-Asia funds.
Speaker: Bearing the exposure to China within these funds will cause a drag on performance.
Speaker: However, Pan-Asia funds have been smart and pivoting
Speaker: quite quickly into Japan and India and this has definitely helped boost performance.
Speaker: So the Pan-Asia strategy should not be overlooked.
Speaker: To finish up, it's worth noting that there are some key considerations for fund managers considering capital raising in the Middle East region.
Speaker: First consideration I would highlight is that each jurisdiction in the Middle East will have a dedicated regulation of
Speaker: And I would encourage all our listeners to fully understand the marketing regulations before traveling to the region.
Speaker: Secondly, the Middle East is very relationship driven, as we've said, and therefore capital raising takes time.
Speaker: Allocators are less interested in short term returns than perhaps other regions.
Speaker: And investors are focused on long term goals, often times attached to the advancement of their regional development agendas.
Speaker: Therefore, expect to travel to the region frequently and to help build relationships as face-to-face meetings are very important for allocators there.
Speaker: As we previously mentioned, converting a meeting into an allocation is challenging and can take time and patience, with many fund managers who are traveling to the region often having minimal success at first.
Speaker: Sometimes it stems from not being connected to the right people, and to this end, I would ensure that you connect to the right decision makers.
Speaker: It's a
Speaker: harder than it sounds as some of these allocators are not necessarily easy to navigate.
Speaker: But this is a key area where I think HSBC can help.
Speaker: Osman, any other points that you'd like to bring up on this
Speaker: Sure, Terry.
Speaker: Many allocators in the region are currently overwhelmed by a number of hedge funds, but also VCs and private equity travel into the Middle East to fundraise.
Speaker: I would recommend going early in the year, especially if a first introduction, say Q1.
Speaker: One, the weather will be better, but more importantly, most of your peers would have already made the trip early in the year.
Speaker: So if you are to leave it too late, then you may take the risk that this allocator has already identified a few new managers.
Speaker: I'd make sure to avoid any national holidays such as Ramadan and Eid as most of the region will be out.
Speaker: Similarly, I would avoid the period of mid-June to mid-September as most people leave cities due to the hot weather.
Speaker: Thank you, Osman.
Speaker: Going back to your point about building relationships in the region,
Speaker: I think this is one of the reasons that has driven a lot of hedge funds to set up offices locally in the region.
Speaker: It shows a certain level of commitment to the region.
Speaker: Obviously, there is also demand from risk takers who wish to relocate there.
Speaker: But having an office on the ground helps funds comply with marketing rules and be closer to key stakeholders in the region, as well as allocator clients.
Speaker: Some hedge funds, and the number is definitely growing, have opted to open up an office in the DIFC or the ADGM financial centers within the UAE.
Speaker: And HSBC has worked closely with both financial centers to help our clients to help them understand what options are available to them.
Speaker: Therefore, if any of our listeners need further information or help in this regard, please don't hesitate to contact us to get some of that content.
Speaker: HSBC has a long history in the Middle East.
Speaker: having had an established presence for more than 130 years cumulatively.
Speaker: To this day, we're
Speaker: still one of the largest international banks in most MENAP countries with boots on the ground and deep rooted relationships across our markets and banking franchise, private banking and asset management.
Speaker: We're always willing to help funds navigate in the region.
Speaker: So please don't hesitate to reach out to us.
Speaker: HSBC is hosting its MENAP Future Forum in February of 2025, which is one of the largest institutional conferences happening annually in the region.
Speaker: We will be hosting a series of targeted panels and events during the conference.
Speaker: So if you'd like to know more about that, please do not hesitate to reach out to us.
Speaker: Osman, that concludes our latest podcast.
Speaker: It has been a pleasure speaking to you today, and I hope our listeners have found this podcast both insightful and useful.
Speaker: Thank you very much.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
