Hedge funds setting up in Dubai to access talent pool, investment opportunities

Global hedge fund managers are turning their attention to the Middle East, with high-profile firms choosing to establish a presence in Dubai amid a strong talent pool and access to a growing asset base.

Last month, the Dubai International Financial Centre, a global financial hub for the Middle East, Africa and South Asia established in 2004, named five hedge funds that had established a regional presence in the hub in the second quarter: Hudson Bay Capital, Asia Research and Capital Management Ltd., King Street Capital Management, Balyasny Asset Management and Verition Fund Management LLC. Those firms join a long list of other money managers present on the DIFC's public register, including Schroder Investment Management Ltd., MFS International (U.K.) Ltd., and FIL Distributors International Ltd. — Fidelity International.

The DIFC said the five hedge fund firms would relocate senior employees to the hub for portfolio management and investor relations activities.

That news followed a record number of hedge funds registering in the DIFC in 2022. The DIFC did not disclose the actual number that had registered, but said in an April report alongside data provider Refinitiv that while the Middle East was "a nascent market for hedge funds, estimated to account for less than 1% of global hedge fund AUM … DIFC is rapidly becoming a global financial center for alternative investments and hedge funds, with the region's largest number of registered hedge funds and more than 60 in the pipeline." Further, the report said hedge funds that are registered with the DIFC manage about $1 trillion in assets worldwide — with global hedge funds assets under management totaling about $4.84 trillion last year.

The DIFC wants to compete with Singapore, Hong Kong and other jurisdictions for hedge fund businesses outside of the traditional global hubs, such as London and New York, it said — and Dubai's management of the COVID-19 period in particular brought it to hedge fund managers' attention.

"Some financial hubs like London, New York and Hong Kong were subject to strict COVID restrictions and stringent lockdowns," said Tom Kehoe, London-based managing director, global head of research and communications at the Alternative Investment Management Association, in emailed responses to questions. "By comparison Dubai took a more balanced approach (combining a strategy of rapid vaccine rollouts, sensible social distancing measures) which allowed them to by and large remain open for business."

Dubai also has a "favorable tax regime (including no personal tax) compared to tax rises being endured elsewhere" and a visa scheme that includes self-sponsored renewable residence visas for "specialist talents" — including money managers — Mr. Kehoe said.

Kenneth J. Heinz, Chicago-based president at hedge fund research firm HFR Inc., agreed that "the pro-business environment/culture and favorable tax setting, in contrast to the U.S. and Europe," is an attraction for hedge funds setting up in Dubai.

And then there's the lifestyle on offer. "The trigger for the influx of institutional managers moving to the UAE has primarily been the change in work culture post-COVID with people looking for a better quality of life," Declan Quilligan, head of hedge fund services at Citco Fund Services (Ireland) Ltd. in Dublin, said in emailed comments. That, alongside the development of the visa framework and the presence of global service providers — including Citco, which opened its regional headquarters in Abu Dhabi's financial center in 2021 — makes the region particularly attractive to hedge funds, he added.

There's also the draw of some of the largest institutional investors or sovereign wealth funds being located in the Middle East. According to research platform Global SWF, which focuses on state-owned investors, Middle East and North Africa-based sovereign wealth funds accounted for 40% of a total $11 trillion in assets as of July. And these clients allocate "right across the asset management industry, including alternative assets," Mr. Kehoe said.

The Invesco Global Sovereign Asset Management Study 2023, published last month, showed that a sample of 80 sovereign wealth funds allocated an average 2.5% of total assets to hedge funds and absolute-return funds. That compares with 63 sovereign wealth funds allocating an average 2% of assets to the strategies in Invesco's 2018 study.

The Alternative Investment Management Association, which has had member representation in the United Arab Emirates for more than 15 years, this year partnered with the DIFC, in an arrangement that Mr. Kehoe said AIMA hopes "will further assist our members in Dubai and support the maturation of the alternative asset management sector in this vibrant location." The agreement enables DIFC to collaborate with AIMA's network of over 2,100 corporate members, representing more than $2.5 trillion in hedge fund and/or private credit assets, a news release by DIFC said.

Executives working at hedge fund firms with a new office in Dubai agreed on the points of the location's many attractions.

While King Street has been involved in Dubai and the Middle East for decades, and has longstanding relationships in the region, "opening an office in Dubai felt like a natural step" in expanding its global presence, Reda Zebdi, managing director, marketing and investors relations in Dubai, said in an emailed response to questions. "Having a physical presence in Dubai also allows us to be closer to our investors in the region and continue fostering current relationships and building new ones."

Then there are the investment opportunities in the region that having boots on the ground enhances, and, "further, given the influence of the region on the global economy, we believe that being on the ground will provide helpful macro insights that will help inform portfolio and risk management more generally," Mr. Zebdi said.

Mr. Zebdi is the only person on the ground right now, but King Street expects to build out its team over time. King Street has about $23 billion in assets under management.

The $57.4 billion Millennium Management LLC incorporated Millennium Capital (DIFC) Ltd. in March 2020, according to the DIFC's public register.

In the DIFC/Refinitiv report in April, Jean-Luc Roghe, head of investor relations, EMEA, said Millennium had "been pursuing a strategic effort across the Americas, EMEA and APAC regions to expand and diversify, both in terms of asset classes and geographies. DIFC has been a key part of this strategic effort."

In the report, Mr. Roghe highlighted Dubai's time zone as being of benefit to managers, enabling "coverage of global markets, spanning from Asia through the United States." Dubai is three hours ahead of British Summer Time, eight hours ahead of Eastern Daylight Time and four hours behind Singapore time.

Mr. Roghe also cited DIFC's growth as a financial center as having "increasingly attracted a strong pool of investment and technological talent. As an organization, we endeavor to meet talent where they are, and provide them with the requisite resources to enable their success," he said.

The multistrategy hedge fund manager has more than 50 employees in Dubai, a person with knowledge of the firm said. Millennium declined to comment.

The founder of a U.S. hedge fund manager that recently gained a license to operate in Dubai agreed that the "talented people who want to go to Dubai and are already located in Dubai" is a key reason for presence.

"Dubai is a place where we do trade local markets, and there are interesting opportunities coming out of there — and it's important to have people on the ground," he said, speaking on condition of anonymity. The firm is looking to hire local talent as well as expatriates.

The Dubai office includes portfolio managers, IT and risk executives. "There is an institutional client base in the Middle East and they like us to have a presence out here — being close to them is helpful."

Prior to establishing an office in Dubai, executives "did an enormous amount" of due diligence, speaking to banks and local regulators, so nothing related to the business came as a shock. The only thing that surprised the executive was the price of office space. He said he'd thought New York was expensive before coming to the U.K. — then realized London was expensive. "But Dubai (is) coming," he said.

DIFC also said it had attracted new private equity managers to establish an office in the hub, including Rockpoint, which has about $16 billion in net assets under management.

Hank Midgley, managing member at Rockpoint responsible for capital raising, new business development and investor relations in Boston, said in an email that the firm "recently opened an office in Dubai to have a presence closer to our major investor relationships in the Middle East."