Hedge fund investors urged to be cautious

Middle East investors must be cautious before investing in hedge funds, most of which are domiciled in locations with little regulatory supervision, said experts at a seminar recently.

"Investors must be careful choosing the products and the fund houses dealing with these products and, if proper care is not taken, investors may end up burning their fingers," said Paul de Quant, managing director, Tilney Funds.

An asset management company handling over $5 billion, Tilney is part of the Refco Group of U.S., a large non-banking futures commission merchant.

Caution by investors is crucial even for capital guaranteed schemes because "if you get the principal after 10 years, you are practically faced with capital erosion.

"The other vital consideration investors have to take is how liquid these investments are. Some of them have good liquidity and some have very poor liquidity," he added.

The seminar was organised in the capital by the local Barjeel Securities to educate investors on modern trends in investments.

De Quant said the global hedge fund industry is currently more than $700 billion in size and growing at 20 per cent a year.

T. Koshy, chief executive of Barjeel Securities, said hedge funds are innovative products but, like the technology funds of the 1990s, investors need to be clear about the pros and cons to ensure they continue to have a balanced and well-diversified portfolio.

The regulatory environment in the Middle East for the financial sector is not well developed, and often many product makers take advantage of this regulatory weakness in their product development and marketing strategies, he said.

"This is so with respect to the kind of products developed, the kind of claims they make, the kind of misleading advertisements and brochures they bring about and the kind of products they recommend to investors without any regard to the financial profile of the investors."

Koshy said when investment climate is bullish, investors get aggressive and, in times of uncertainty, they retract into a shell.