Tuesday, January 31, 2023

Dubai lures hedge funds – but European hubs stake claim

Photo: diana.grytsku

The western world is mired in high inflation, war in Ukraine and possible recession. Asia, meanwhile, has been afflicted by ongoing Covid lockdowns, fuelling a supply chain crisis and political discontent. 

No wonder Dubai, the sun-drenched tax haven in a favourable timezone, currently benefiting from soaring oil prices, has been staking its claim as a hedge fund hub.

Recent analysis in Bloomberg and the FT has focused on the trend. Firm data is hard to come by, but it is widely known that Millennium is growing its footprint in Dubai while fellow multi-strat giant ExodusPoint has registered an office. Many smaller hedge funds are also moving staff to the emirate, the most populous in U.A.E.

“The coming months are going to be really tough in most countries, there will be a lot of unrest globally, largely because of cost of living crisis: the U.A.E may end up being a more convincing solution than places like London or New York,” a portfolio manager at a New York hedge fund, moving to a Dubai-based investment company, told AFI.

“Taxation in Dubai is simply not comparable: and it’s not going to get any better in the West given the skyrocketing level of debt after Covid.”

The city is situated in a very advantageous time zone for anyone trading Asian and European assets. The country is a tax free business hub – income tax is zero, and corporate tax will be 9% starting from mid-2023.

In the last 24 months, oil prices have increased 150%, generating significant surplus in the nation’s already cash-rich sovereign wealth funds and high net worth individuals – among the most substantial hedge fund allocators.

But some evidence suggests that setting up in Dubai isn’t as easy as it seems.

One industry insider said the very hot weather, different cultural environment and lack of a hedge fund network serve to discourage traders from moving to the Gulf country.

And in 2020, Luca Toietta, formerly of Elan Capital Management and Pine River, moved to Dubai to launch his hedge fund, a relative-value shop called Permaneo Capital. After less than a year, they quit operations as attracting talent to the region proved harder than initially thought.

Shorting is now legal in the U.A.E, but prime brokers in the region say it is often hard to put into practice. And increasingly, sovereign wealth funds are hiring internal CIOs to manage portfolios, rather than allocating money to external funds.

Francesco Filia, CEO of $3bn London-based Fasanara Capital, also thinks the environment is not ideal for hedge funds. “I have heard of a few funds that moved parts of their operations to Dubai, but it is mainly client management or distribution, not investments,” he says.  

“Rather than Dubai, portfolio managers are relocating to continental Europe, like France or Italy. And Switzerland is experiencing a real hedge fund boom at the moment, especially when it comes to tech and crypto-focused funds.”

According to industry data, Switzerland is now home to nearly 300 hedge funds, many of which are in systematic or crypto strategies.

Regulation around crypto is higher, which many participants perceive as a strength, as it enhances regulatory clarity and investor protection. Places like Zug, Lugano and Chatel are seeing a slew of new launches.

So it seems that, despite the advantages that the U.A.E can offer, continental Europe and Switzerland are fighting to be the alternative to New York and London.

Ludovica Brignola is a financial journalist based in Istanbul