The company has two flagship funds available for distribution within the Middle East – the Venture and Asia Plus funds – which have combined assets under management of around $500m.
Q: We spoke to chief operating officer Jim Quinn and started by asking him to explain the background to Lionhart’s presence in the Middle East, and why the firm had chosen global multi-strategy arbitrage funds specifically.
A: “Some of our very first investors ten to twelve years ago were from this region, and they have stayed with Lionhart throughout that time. They have not shied away from us in any shape or form. I personally have more than 20 years’ experience in the asset management industry and have been in the Gulf for about ten years. The conversation started with Terry Duffy, [Lionhart’s chief operating officer] a couple of years ago with regard to the opportunities building in this region. There were some strong themes there – obviously the liquidity and the fact that Lionhart had a very strong focus on natural resources and minerals. There was obviously a strong correlation between those trading issues and the Gulf region anyway.
“That was basically the start of our presence. We made some investigations, submitted the application to the Dubai Financial Services Authority (DFSA) about a year ago, and we are just setting up furniture in the Dubai office now. “The reason we chosen global multi-strategy arbitrage funds is the background of the ceo, Terry Duffy. We have a three-man management committee: Terry Duffy is the ceo and chief investment officer, and is based in our Toronto office. Neil Ebers is the chief operating officer and based in our London office and Barry McQuain, the chief technology officer is based in Singapore.
“Each have over twenty years experience in the trading industry. Both Terry and Barry’s backgrounds are allied to computer science and maths and they both cut their teeth in the 1980s in Japanese warrants, and all sorts of European trading as well. So combining the skillsets of the three-man management committee generated the multi-strategy approach and the very broad geographical focus as well.”
Q: What does the presence in Dubai entail?
A: “A big part of the decision-making process was where to be in the region. We had a lot of experience on the ground in Dubai but Bahrain and Qatar are also vying for pole position as a financial centre so we considered all those regions. But the DIFC certainly has the infrastructure with the eyes of the world on it so that was the obvious choice.”
Q: Why do think Dubai has taken the lead in the region?
A:”I think it has been very cleverly marketed. Bahrain and Qatar offer in detail slightly different propositions but I think the way the DIFC environment has been established and the DFSA regulatory environment put together is probably market leading. What they have attempted to do from a regulatory point of view is establish an environment in the GCC that is under European law, has independent courts and that has taken the best practice from the UK, US and Australian regulatory regimes and put them together. It is a high level of regulation and a high platform that they have set themselves, and the money has been spent to build the infrastructure as well.”
Jim Quinn, chief operating officer, Lionhart (Middle East)
Q: Are you planning to launch any funds specifically targeting investors in the region?
A: “We can not ignore that opportunity. We have a huge depth of experience across all sorts of market sectors. We already invest to a small degree within some of the GCC markets and we are having discussions with a number of institutions. We may well consider further down the road a GCC or a MENA-type of fund offering, but it is early days. The problem is that it is illegal to short in the UAE but there are moves afoot to change that and we are obviously keeping an eye on the environment. We are opportunistic and we will take opportunities when they come up.”
Q: Are you tailoring any existing funds and if so which ones are they?
A: “The existing funds that we are primarily focussing on are the Asian fund and the Venture fund, which is the natural resources, mining and minerals fund. It is probably fair to say that a lot of the underlying assets within the Venture fund are not within this region, but we do have interests in other areas. We would like to think that – again this is not going to happen overnight – but some of the structures we have within the Venture fund and certainly within the private equity fund that we have lend themselves quite comfortably towards Islamic compliance. And again we are having some discussions with institutions in the region to try and take that forward.”
Q: And will those funds be distributed throughout the region?
A: “Yes they would. We are not specifically focused on this geographical region per se, although that is obviously the main target market, for example there is a strong correlation between the GCC countries and Switzerland. There are monies made here but it is parked over there so we do find ourselves covering that region as well. I think just by definition we cannot ignore India and the Northern African countries as well are a point of call, so it is quite a big remit.”
Q: Do you think the role of global multi-strategy arbitrage funds will grow in the region and if so are you looking to capitalise on this growth?
A: “Yes, we are opportunistic and we will take a global view. Over a number of years Terry and Barry have developed a very sophisticated in-house proprietary technology system, which is a risk management data and order processing system. That enables us to take a 24/7 view around the world, given the geographical positions of the management system as well.
“Obviously at the moment the GCC has a fairly strong non-correlation to the rest of the market and money is flowing in. A lot of local asset management companies are gathering a lot of money. Like all others things that will be swings and roundabouts and it will balance out in time. We think that money from the Gulf may have slowed down a bit so we may look to more global opportunities, but yes we do see growth in this area.”
Q: Currently the region only accounts for around 10% of Lionhart’s assets under management - what steps are you taking to boost this?
A: “We have gone through the regulatory process, which has taken about a year and by definition capital raising and marketing has very low key and taken a back seat. Ramhadan, which takes place during September, is a quiet period but from October onwards the marketing will start. We intend to get out and bang the drum. We have a very strong story and a long track record and a lot of contacts in the region within family offices, private banks, high net worth individuals and some of the institutions. We are looking to raise money in those sectors, raise the profile of the company and get out and tell the story. And what gives us an edge is the fact that there are not that many other hedge funds resident within the DIFC environment.”
Q: What types of GCC investors are you targeting?
A: “We are targeting all sorts. Historically our client base has been institutions, corporates, high networths and family offices for proprietary money and we will continue to pursue that. The regulations have changed a bit recently within the DFSA which is moving towards making it more retail-friendly. The intent is to embrace Ucits-type legislation and relax some of the rules governing companies regulated within the DFSA. That is not something that we are looking to pursue but we may consider other retail distribution channels a little further down the road, and maybe pursue joint venture partnership arrangements with some local institutions.”
Q: How have you been received in the region? How difficult is it to establish a presence?
A: “It is difficult. The DIFC have received around 200 regulated companies in the last three or four years since its inception. That is a phenomenal inflow of companies and it is still going apace. I think we have a unique story in terms of the longevity of the company, the funds and the technology. Certainly from early talks that we have had with some fairly high level contacts in the region we have been very well received and we see the future as being very positive.”
Q: How have those funds performed?
A: “The Venture natural resources fund took a bit of a hit in July – I think the whole world did – due to links with the PGM Platinum Group Metals but nothing too traumatic. We believe that if there is a slight turnaround in that space we will quite confidently make up by the end of the year the ground that we lost in July. We take the view that natural resources and minerals in general is a very strong long term trend and like anything else there is going to be ups and downs because it is a volatile fund by definition.
“The Asia fund is flat slightly up year to date. We took very defensive positions towards the end of last year and we have maintained that. We are keeping our powder dry and given that a lot of funds in the region are down 30, 40, 50 – and some funds down 60, 70% - we are pleased to have held firm on previous gains we have made over the past four or five years trading there.”
Growth of the Lionhart Asia Plus Fund based on an investment of $1,000:
Q: Are sovereign wealth funds investing in your funds? If so are there any issues related to the size of investment?
A: “We are in communication with a number of sovereign wealth funds. They all have their own criteria, in terms of longevity of the manager, track record, assets under management. Some are considering us and we are on their watch lists, some of them we probably would not meet their criteria.”
Q: London is the biggest financial market currently. On the basis of your experience how big can the GCC become? And how big can Lionhart get – is there any cap on size?
A: “The potential for the GCC region is enormous. The time zone is fantastic, the infrastructure – whilst it has had its hiccups – is getting there in Dubai, Qatar is building very fast, Bahrain has its financial harbour coming up www.bfharbour.com.
“The region in general has so much liquidity and will to make it succeed and a lot more diversification today. The historical reliance on just oil for wealth is going away quite quickly. Service industries are building very fast – it is a great place to live, the weather is good and the lack of taxation helps. So I think the future is very good.
“In respect of Lionhart, we are fully committed to the region. We have taken the time and expense to set up a fully regulated office in the region. We did not necessarily need to but we have to show commitment to the region and I think that is important to middle eastern investors as well. There is not necessarily a limit that we have in mind but we would like to see in the region of $1.5 to $2 bn in assets under management within the next two to three years.”