There’s nothing like a crisis to challenge a strategy, and Mena has seen more than its fair share of problems over the past few years. When Feri Institutional Advisors first visited the region in July 2008 looking for alternative investment opportunities, head of manager selection Marcus Storr was particularly struck by the can’t-lose attitude of many fund managers, as yet unaffected by widespread market turmoil.
Storr was left with a feeling that the managers were overly self-confident, and the company held back on making an initial allocation. A few months later, Mena experienced a crisis that challenged even the biggest and most self-assured names in fund management.
“When we had those meetings, we had a feeling that some of the managers were slightly overconfident,” says Storr. “This happened in China four or five years ago as well. You meet some managers and they only have the experience of markets going up. The budget surpluses in these countries were so immense that they felt nothing could go wrong anymore and this is obviously the time when things go wrong.
“Did we see the crisis coming? No, not in this regard, but did we feel strange about the managers’ confidence? Yes. This is not due to the management capabilities of these guys – most of them have a very good background, excellent education, perfect English skills and a good sense of the financial market, but they seemed to believe that the markets could only go in one direction.”
During this trip, the company realised that Mena represented a long-only play and as a hedge fund investor, it chose not to invest. However, this decision is by no means permanent, and the company continues to take exposure to Mena through an allocation to an unnamed London-based, Mena-facing fund manager. Storr confirms that Feri is still in communication with the managers it met three years ago, and will certainly reconsider investments to regional fund managers in the future.
Great potential
It is fair to say that Feri takes a quantitative approach to manager selection, visiting between 100 and 130 managers each year in the hedge fund space alone. While Storr focuses on the hedge fund side of the company, Feri has three distinct business lines: Feri Family Trust, a wealth management department combining roughly €2bn ($2.8bn) of discretionary assets under management; Feri Euro Ratings and Research Department, a research department with respect to all sorts of asset classes and macroeconomic research; and Feri Institutional Advisors, one of Germany’s largest funds-of-funds.
Founded in 1987, the firm now advises institutional clients to the tune of €14bn. “We do not manage funds-of-funds in a ‘retail’ sense,” explains Storr. “So we are not a FOF distributor, we have no sales team and all our portfolios and structures are dedicated to particular client needs. We build tailor-made fund portfolios within the hedge fund space, for institutional clients.” There is also a long-only element to the institution, and Mena is considered a viable investment option from both a long and short perspective. In fact, Storr sees great potential in the Mena hedge fund space.
“The market itself offers a lot of opportunities to play in the equity world from a long/short perspective,” says Storr. “This is what we like. Obviously a very large industry in Mena is the oil and gas industry, so from a hedge fund perspective it’s a good set-up to play this region.”
However, there is a lot of work to be done before regional managers can expect to win a Feri mandate. Storr calls for improved trading instruments, including shorting, as well as a reduction in fees. “If you want to have an outright long-only exposure to a particular region, you should not be investing in a manager who charges 2% management fees and 20% performance fees,” says Storr. “You can just buy an ETF or a long-only manager who charges 100bps or something like that. If you know that a manager is long only, you don’t need to pay 2% management fees.”
However, a bigger roadblock may be the fact that a lot of Feri’s institutional clients simply can’t see past the political risk factor. ”The perceived risk of the region is keeping a lot of investors away and over the last few years I can’t remember a dedicated client coming up and saying: ‘I want you to put Mena into my portfolio’,” admits Storr.
Survival of the fittest
Political unrest has had an undeniable impact on the industry, particularly in recent months, and although Storr says that investors “can’t factor this into our conversation and certainly not into our decision-making process”, it probably hasn’t helped Mena’s case. However, Storr firmly believes that the region’s recent crises will result in better managers.
“If you have survived in a crisis mode, it’s always a good experience,” he says. “My honest opinion is that you learn much, much more through crisis than to say, ’I’ve been a good manager because the Dow Jones rose 20% and I made 25%’. Managing the subsequent downturn shows the ability. You learn a lot if things go sour. If it’s dangerous or difficult, this is where you learn.”
And Storr is already seeing a shift in manager attitudes. “These guys have learned a lot,” he says. “Not only with regards to the hedge fund industry but also with regards to financing. In Dubai, the financial markets were very much driven by real estate, and when there is one sector driving the market, it is not always good.”
Flexibility and diversification play a key role in Feri’s manager selection process. A strong operational set-up, including a high level of compliance and good regulation are also a must. “These are elements we check in our due diligence process and which might lead us to judging local managers as being investable,” says Storr. “Even in 2008, we had the feeling that most of these managers were not properly set up.”
During the 2008 trip, Feri identified 20- 25 key funds, and met with fund managers including Saudi Arabia’s Ajeej Capital, which Storr describes as “very solid”, as well as Algebra (“an excellent set-up”) and identified Shuaa Capital and EFG-Hermes as market leaders. However, since then, many of these funds have struggled to regain ground. “Some of the funds lost a lot of assets during the financial crisis,” says Storr. ”Some of them lost 80% or 90% and in comparison with other fund centres worldwide, they haven’t seen that money coming back. The money went out and didn’t come back to the same extent at all.”
However, Storr adds that things are slowly starting to change. ”I think there’s still a cloud around this area where only investors who have been to the region or have local contacts understand it,” he says. “We don’t have any fear about investing into the region, but into the region could mean into a manager investing into the region; it does not mean that it’s a manager in the region. There are high quality managers in London as well. So I think there’s a certain scepticism, an overweight of the political situation rather than the financial opportunities down there.”
Q What can Mena fund managers do to attract new assets?
