Fund view-Evolvence wary on Gulf utilities, likes banks
By Jeffrey Hodgson
HONG KONG (Reuters) - Gulf utility stocks should be approached with caution given their need for high capital investment in the next few years and limited pricing power, the manager of the Evolvence MENA Hedge Fund said on Wednesday.
But shares of Gulf banks offer some of the region's best investment opportunities given high earnings growth and their leverage to booming local economies, said Kamal Fayad, the Dubai-based manager of the $50 million (28 million pounds) fund.
"We are pretty bullish on financials in the region ... the spreads are pretty high," he told Reuters in an interview in Hong Kong, where he was attending a hedge fund conference.
"Just look at their results the last couple of years. Their results are increasing by an average of 20 to 30 percent."
By comparison, he said the returns of utilities would be limited in the coming years, even with demand booming, because of their need to plough capital into building new infrastructure to deliver power and water.
"The investment in the beginning in these central hubs is huge. And it takes two or three years for construction before reaching a point of inflection where they start generating cash," he said.
The multistrategy hedge fund was launched in March by closely held Evolvence Capital. The Dubai-based alternative asset manager is headed by Khaled Al-Muhairy, who previously worked for the Abu Dhabi Investment Authority. Evolvence also seeded the fund, with the remainder of its assets coming from Gulf investors.
Fayad said the firm has soft commitments for additional investment which should increase its assets to over $100 million by the year end.
"Our capacity for the moment is up to $500 million, but it can increase because the Middle East is moving so fast," he said.
The fund, which is managed by a team of eight, has generated a return of more than 10 percent after fees since its launch. It charges a 2 percent management fee and 20 percent performance fee.
The fund invests in Gulf Cooperation Council market equities, equity derivatives and convertible sukuks. Fayad, a Lebanese-born French national, said the fund typically has about 20 positions, split between core investments and trading opportunities.
Current holdings include First Gulf Bank FGB.AD and Qatar National Bank QNBK.QA, as well Abu Dhabi-based property firms Aldar Properties ALDR.AD and Sorouh Real Estate SOR.AD.
The former trader, who spent seven years at Deutsche Bank (DBKGn.DE: Quote, Profile, Research, Stock Buzz), said many of its positions are hedged with derivatives. A short position in a stock for example might be offset with the purchase of a call option, which could be exercised to limit losses if the stock rises.
The fund has this type of covered short position on Air Arabia AIRA.DU.
But Fayad, a former equity derivatives specialist, said given that the region's less liquid markets were more prone to mispricings, the fund was seeing some of its best opportunities in convertible arbitrage.
Some of these trading opportunities had margins of 4 to 5 percent, which would be unheard of in the more heavily traded U.S. and European markets, he said.
"I don't need to be completely directional. There are enough arbitrage opportunities in the Middle East," he said.
"When we had a 1 percent margin on a convertible (trade) in Europe, we used to kill for that."
http://www.reuters.com/article/managerMoves/idUSARO04682820080910
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