Mena Fund Manager looks at recent trends in the region's hedge fund sector

Although the Mena hedge fund sector remains small compared with other geographies, there is still a fair level of interest in the region's funds and managers.

The sector has risen from a few hundred million dollars at the turn of the century to more than $4bn at the end of 2015.

While the number of new launches may have tapered off, interest in the sector remains constant. However, as 2015 proved a challenging year for all funds and managers, it also proved for the region's hedge fund sector.

Worst year since 2011

Mena hedge fund AuM rose marginally last year, increasing from $4bn at the end of 2014 to $4.1bn at 31 December 2015, according to data provider Hedge Fund Research (HFR). However, this was slower than the growth of total emerging markets hedge fund assets, which increased by around $8bn last year to $191.3bn.

"Total hedge fund capital invested in Mena-focused hedge funds posted a small increase in 2015," says Kenneth Heinz, president of HFR.

Global growth slowdown and falling oil prices took their toll on markets last year as companies across the region struggled to adapt to prolonged uncertainty and volatility.

The impact was keenly felt by the region's hedge fund managers, as the HFRI Mena Index - a performance index designed to reflect the performance of the Middle East and Africa region of the hedge fund universe - also endured one of its toughest spells during 2015.

"The HFRI Mena Index declined -6.8% in 2015, the worst year and fi rst decline since 2011; the overall HFRI Emerging Markets Index fell by -3.3% in 2015," explains HFR's Heinz.

In comparison, the HFRI Fund Weighted Composite Index - a global, equal-weighted index of more than 2,000 single-manager funds - was down by -1.1% during 2015.

Another tool in the box

Reflecting some of the difficulties facing markets and the global economy in 2015, macro and equity hedge strategies were among the least popular emerging market hedge funds of last year, according to Heinz, noting that event-driven and relative-value arbitrage were among allocators' most sought-after.

Regulatory restrictions within the region affecting some hedge fund investment strategies partly explains the limited growth of the sector, compared with other regions.

While shorting remains difficult in the region, it is potentially very lucrative, particularly in current market conditions where the price of oil has weighed heavily on some sectors.

"There aren't many [pure] Mena hedge funds; most are long-only," says Roger Allen, managing partner at London-based hedge fund MENA Capital. Allen says the ability to short companies in the region contributed to its outperformance of regional indices during 2015.

As well as shorting, the ability to use cash as a hedge and the ability to lever the fund has helped it during recent down markets and also offers the ability to take advantage of current low valuations.

"2015-16 was a tough year, but having extra tools in the box is very useful," he explains.

With markets sharply down at the start of the year and only just beginning to show signs of having arrested the downward slide in prices, hedge fund strategies could yet deliver respectable returns for investors in 2016.

© MENA Fund Manager 2016