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Big scope for alternative investments in Mideast

Swiss lender UBP expects good business in region this year

Alternative investments have a bright future ahead in the Middle East as investors opt to diversify their asset portfolios following a strong recovery in equity markets, according to the top official of Union Bancaire Privee, or UBP.

The Swiss bank, which has offices in the Dubai International Financial Centre and Beirut in the region, expects good business this year as it considers the Middle East an important market for its operations.

“Middle East investors show strong interest in alternative investments as they are looking at better options to diversify their traditional assets and to have better yields and returns,” Arie Assayag, chief executive officer of alternative investments at UBP, told Khaleej Times in an interview.

UBP, which was founded in 1969, specialises in private banking and is one of the most strongly-capitalised and independent private banks. It is one of Switzerland’s leading lenders and is among the best-capitalised institutions with a tier-1 ratio of 29 per cent.

The bank specialises in the field of wealth management for both private and institutional clients. It employs about 1,350 people in 20 locations worldwide and held $98.6 billion in assets under management as at December 31, 2013.

Assayag said Middle East investors may find alternative investments as a valuable option that can help serve their interests in diversification of asset portfolios with better returns. He said the bank noted strong interest in alternative investments from the region in past one year.

“Indeed, there is a strong interest, since a number of investments cannot be done outside the hedge funds space. The pick-up has been stimulated by the sharp uptrend of equity markets and negative performance of bonds, as well as by an increased search for diversification within portfolios,” he said.

To a question what percentage of an investor’s portfolio should be in alternative investments, he said the bank usually recommends 20 per cent, so as to have 10 per cent invested as an equities-diversification and 10 per cent as a bonds-diversification. UBP, which manages more than $12 billion in assets during the past 10 years, offers some good options to investors in alternative investments.

“The role of hedge funds within a portfolio has significantly changed over the past years. At UBP, we identify three distinct roles to cater to the needs of investors.”

Elaborating, he said the first one meets absolute return needs and acts as a diversifier to the non-risky part of a portfolio (fixed income).

“This profile targets a Libor plus 500 basis points return with a risk budget similar to that of fixed income and is de-correlated to traditional assets. It offers monthly liquidity and high transparency,” he said.

The second one, he said, meets directional return needs in a liquid format and acts as a diversifier to the risky part of a portfolio (equities). “It is a thematic type of investment that favours long/short equity, long/short credit, global macro and commodities trading advisor strategies.”

Assayag, an industry veteran for over 20 years, said the last one meets directional return needs in a less liquid format and acts as a diversifier to the non-liquid part of a portfolio (i.e. private equity, real estate or infrastructure). “It includes strategies such as event driven, activist or distressed.”

On the reasons behind growing interest in alternative investments, he said consistent good performance of hedge fund managers and right diversification of traditional portfolios are two chief reasons behind the success of this segment in today’s banking industry.

“Although the industry as a whole can seem disappointing, talent remains and some hedge funds have been able to generate strong performances during and post-crisis. It is thus no longer worth to look at the overall universe when investing in hedge funds and it is preferable to rely on a very strong expertise in terms of manager selection.”

He said diversification to traditional assets is important, but challenges in terms of portfolio allocation remain intact for investors.

“Bonds’ performance is unattractive and equities can be volatile. Furthermore, the negative correlation between bonds and equities is now being challenged. In this context, hedge funds have a true diversifying power and enable investors to gain exposure to specific risks that can only found in hedge funds,” Assayag concluded.

— muzaffarrizvi@khaleejtimes.com