Business | Investment
Informal fund businesses 'have no legal standing'
Informal fund management businesses run by individuals are rampant on the UAE stock exchanges, real estate sector and commodity trading, according to fund managers and real estate firms.
- By Babu Das Augustine, Banking Editor
- Published: 00:00 April 29, 2008
Dubai: Informal fund management businesses run by individuals are rampant on the UAE stock exchanges, real estate sector and commodity trading, according to fund managers and real estate firms.
UAE Central Bank Governor Sultan Bin Nasser Al Suwaidi told a local Arabic daily yesterday that these fund management businesses are illegal and only funds managed by banks or investment firms are licensed.
"Pooling of resources by friends, relatives or people known to one another and entrusting one of them to manage the funds is common practice. Such businesses are run on mutual trust and do not have any legal recourse if the manager fails to deliver, defrauds the fellow investors or he dies. Such practices should be avoided and people should seek investments through legal channels," said Shehab Gargash, Managing Director of Daman Investments, a leading Dubai-based fund house.
Informal collective investments are not restricted to stock markets alone. While it has been very common in merchandise trading in the past, the real estate boom has paved the way for informal pooling of resources and investing in real estate assets for trading purposes.
Strategy
The modus operandi of most of these funds is to invest in off-plan projects and then sell them in the secondary market at a big premium. Many such funds promise returns of 15 to 40 per cent. "As the real estate markets are booming, many such funds are able to deliver the promised returns. But failures of these funds can distort the market and can cause huge losses to investors," said a real estate broker.
Informal collective investments are common among GCC nationals and several expatriate groups living in the UAE.
In real estate such funds are known for large-scale purchase of entire buildings or projects to resell at a substantial premium. In most cases these investments are made in the name of a single investor or a company whom others in the pool have entrusted their money to invest without sufficient proof of their contribution. Chances of misappropriation by the manager are very high.
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