• Home
• News Article

Permal assets grow to USD23bn on volatility-reduction strategies

By Yazad Darasha
A greater appetite for flexible investments coming from institutions such as sovereign wealth funds, pension schemes and public and private endowments resulted in hedge-fund manager Permal 's assets under management growing from USD 22 billion in 2010 to USD 23 billion this year, of which USD 4 billion is attributed to the Middle East and North Africa, according to Chairman and Chief Executive Isaac R. Souede.

The rest of the global hedge-fund industry has not had a good time over the same period. According to the HFR Global Hedge Fund Industry Report for 3Q-2011, hedge funds posted the fourth-worst quarterly performance in industry history, as a combination of uncertainty regarding the European sovereign debt crisis and weakening economic data contributed to volatility across equity, credit, commodities and currencies. These performance declines reduced total hedge fund industry capital by USD 85 billion, Hedge Fund Research said.

The asset decline ends two consecutive quarters in which total capital under management eclipsed new record levels, and brings total hedge fund industry AUM to USD 1.97 trillion. The HFRI Fund Weighted Composite Index declined by 6.2% for the third quarter of 2011, wiping out a small 1H-2011 gain and bringing year to date performance for the index to a decline of 5.4%.

Souede, who also wears the hat of Chief Investment Strategist at the Permal Group, believes that his firm's handling of events that create volatility is one of the prime reasons why Permal posted an increase in AUM while a lot of its peers saw erosion.

"We have a lower-volatility way of addressing events. We prefer stability and we take a longer view," Souede told Zawya at a media briefing. "This is difficult in the current situation when all markets are way beyond their traditional volatility trends. The S&P 500, for instance, is currently at a volatility level of 19 compared to its long-term levels of 12 to 14," he said.

The Permal Group has been cited in media reports as one of the entities that managed the Libyan Investment Authority's funds, but reported negative returns.

Macro Strategies

Permal uses macro strategies to try to dampen some of the effects of volatility. "In 25 years, I've never seen political and policy process overwhelm the markets as much as they are doing today. Stocks are reacting about 92% to macro events and only 8% to fundamentals. The traditional reaction is about 70% macro.

"Clients are also choosing macro strategies in conjunction with sophisticated fixed-income investing," Souede said.

"Global markets are more interconnected than they have ever been. As an investor, the front pages have become more important than the business pages, and investor portfolios need to reflect this, with more tactical and global macro, seeking exposures to fixed income, currencies and credit, and less equities. Macro has proved resilient during periods of volatility over the past years and is the best approach for downside protection and consistency of performance," he said.

MENA Investor Trends

"Investors in this region are looking for more exposure globally. They are looking for more diversification and downside protection," said Tom Seif, Permal 's senior vice-president who heads the Dubai office.

According to Souede, the search for diversification will "continue to be strong". He said: "More private equity money will stay in the region, but it is difficult for liquid market investments to remain here. For instance, about USD 1 billion is generated each day in Saudi Arabia. It will certainly seek deployment in more diversified way globally."

Local investors' portfolios are still dominated by regional equities and bonds, but they are now looking to spread risk across asset classes, seeking longer-term returns and greater downside protection, Souede said.

"International investments and absolute return funds have been beneficiaries. Having learnt harsh lessons three years ago, investors are now paying far closer attention to investment mandates and performance during the financial crisis," he said.

"Managers generally see the UAE as secure markets, with few of the difficulties faced by European sovereigns and financial firms. This is a very different situation from three years ago. In general, caution has paid off and central banks are seen as prudent. The UAE has improving fundamentals and attractive valuations as geopolitical concerns fade into the background.

"Foreign interest is certainly returning. Liquidity is sitting on the side-lines just waiting for an entry-trigger point. Should the MSCI upgrade frontier markets and emerging markets in the next six months, UAE equities will benefit. Our managers' favorite sectors are regional banks, materials, telecom and capital goods," Souede said.

Arab Spring Effect

The revolutions in many countries of the MENA region have created an "inevitable" uncertainty in the minds of investors, Souede said.

"At time the capital is uncomfortable and at times the capital leaves. If your home is on fire, you are not worrying about which music system you buy," he said.

Highest Returns

Souede sees periods of high inflation and high interest rates as the best time to seek high returns. With interest rates close to zero in most of the developed world, returns are likely to come from emerging markets, he said.

"If the interest rate in any given market is 3% or 4%, I can give investors 8% to 12% returns. But US Treasury bills are currently at zero. And I see inflation in the developed world coming down. In such a scenario, 6% to 8% would be a very good return," Souede said.

He sees the Chinese economy heading for a soft landing, followed by Brazil and then India. Analysts have considered China's growth engine to be overheating, and the Asian giant saw GDP growth soften to single-digits in the third quarter of the year, compared to just over 10% in the second quarter as demand for manufactured goods from its traditional markets in the US and Europe dropped.

"There is a 90% probability of a soft landing for China in the likelihood of a recession in Europe and stagnant growth in the US," Souede said. However, China may have a hard landing if Europe goes into depression and the US sees another recession, he added.

US & Europe Prognoses

A lot of the US economic future currently rests in the hands of the super committee on deficit reduction that is composed of six Democrats and six Republicans, according to Souede. "If this committee votes 6:6 on effective deficit-reduction measures, the US will have to cut discretionary spending in order to meet deficit targets. If this happens, we will see a recession in the US in 2012."

About 35% of the US budget comprises discretionary spending that includes healthcare, education and the military.

In Europe, the choices are starker, Souede believes. "They can choose to either break up the Eurozone, or formalize the union into a federal one - the United States of Europe.

"If they continue in the loose grouping that grows at different speeds, manages fiscal policy differently but remains governed by a single monetary policy, they will need to keep applying larger and larger Band-Aids. And that's exactly what the bailout fund and schemes are: they are Band-Aids," Souede said.

© Zawya 2011