At the start of 2018 hedge funds were looking for increased volatility to help drive their profits, the US had a good trading relationship with China, there was a possibility of getting Brexit sorted and bitcoin was at $13,700 a coin. Twelve months later the $3 trillion hedge fund industry is licking its wounds with only 16 funds out of the 450, covered by HSBC’s alternative investment group, returning a profit.
The wished-for volatility caused many funds to lose money and most were outperformed by the S&P 500. A trade war had started between the US and The People’s Republic of China, no decisions had been reached on Brexit and Bitcoin had lost almost exactly $10,000 dollars in value. So, one month into the New Year it is no surprise that investors are asking a number of questions about the future investment strategies, they should adopt.
Philippe Ghanem, CEO and Vice- Chairman of ADSS, a firm which in the last eight years has built itself into a highly-respected trading and investment firm is very clear that the UAE is well placed to manage these potentially challenging times. The ADSS advice is to take a longterm view, reduce exposure to risk and look at the underlying fundamentals of the markets.
Unlike hedge funds, forced to try and create massive returns, ADSS works with clients to maintain and build wealth for current and future generations. So where can investors find value? Many have been searching for yield as the low-interest rates in Europe and the US closed off a number of traditional investment options. The strength of the US dollar has been a benefit but the fluctuations in the price of oil remain a concern.
However, when the returns from financial investments in certain areas and markets become unfavourable the good news is that new options always open up. For Middle East investors, the local GCC region is now becoming very exciting and creating interest around the world. ADSS believes the GCC countries now offer, in the medium term, excellent investment options.
The GCC is seen as the new emerging market. Most of the countries in the alliance have their currencies pegged to the US dollar, so have been positively affected by the strong dollar. They import most of their goods, have large foreign currency reserves in their sovereign wealth funds, and they have among the lowest debt/GDP levels in the world.
This is unlike the traditional emerging markets which exhibit high debt levels—making them far less attractive to investors. In addition, several of the GCC countries have recently been upgraded to emerging market status by both the MSCI and FTSE. This is encouraging traditional emerging market investors to allocate funds to the region.
This added stimulus, to an already buoyant market, is being helped by the diversification drive away from dependency on oil, led by the UAE and Saudi Arabia, and presents a significant upside opportunity for international investors. The GCC financial markets have been regarded, by non-regional investors, as difficult to access, however, internal developments and the use of new technologies has helped to change this situation.
Exchanges like the Tadawul in Saudi Arabia are actively embracing change and the markets like those in the UAE are leading the way on innovation to increase their competitiveness. For example, the Abu Dhabi Global Market (ADGM), situated close to ADSS’s head office, has created an environment which can support international and local financial and banking institutions.
Feedback shows that the ADGM is recognised as being better regulated than other comparable offshore financial centres. It has a legal system based on common law and offers a fast-to-market turnaround, as well as sophisticated dispute resolution, including a digital court platform which is seen as a game changer in the region.
ADSS has always been an advocate of firm but fair regulation which provides a level playing field for all market participants. Under the leadership of Ghanem it is investing in fintech innovation, which includes the automated on-boarding and KYC (Know Your Client) of traders, which is just one part of the high-quality compliance ADSS offers. The investment in fintech is not limited to regulatory systems. ADSS has become a leader in developing a range of business systems which improve the service traders receive.
These included data-mining, machine learning as well as artificial intelligence (AI). The management of the firm believes that that we are on the edge of a revolution which will change all areas of financial services. From institutional clients through to individual traders, technology is present in all areas of their lives. No-one stands at the side of the road and waits for a taxi, or goes into town to shop, or rushes home so they do not miss their favourite TV programme. They call an Uber, shop online and watch Netflix.
Technology has changed our lives so it would be naive to assume it will not change the way that we access and trade a range of asset classes. From its formation ADSS has been investing in algorithm based platforms, mobile technology and AI and knows that this is the way forward. The next generation fintech can provide four interlinked deliverables—security, access, transparency and advantage.
The technology has to be informed, fast and personalised to the people who use it and, because this is a very competitive market, it has to be able to reward loyalty. As a leading investment firm, which has offices in Asia and Europe, ADSS understands the importance of being customer-centric, which can only be delivered through technology which learns from its clients. We are living in a digital age which has led to the democratisation of trading.
More than ever, clients expect to be using platforms, systems and apps which can provide instant access to appropriate sets of data and then apply sophisticated analytics to obtain the trading insights which will guide their investments. The new generation of clients understand how and where their data is being used, and expect to be selectively and accurately targeted, as to offer them value.
They want the trading options and offers they are interested in sent directly to them. They also have a different view on accessing markets. The digitalisation of assets, including cryptocurrencies, has changed perceptions of investing. Digital assets are available through decentralised networks which they can access directly. There is no need for an intermediate broker, traders are going direct to the market, and want the same access, control and visibility applied to traditional markets.
The notion of being tied to your desk or sitting waiting for your broker to call you back is long gone. Trading is now informed, fast and direct. This means that technology has to change the products and services they are buying. ADSS prides itself on developing world class services which help clients’ decision making.
Trading will always be very personal but the new breed of investors demand easy access to quality streamed information, mobile applications and products tailored to their requirements. Social marketing and information is 24/7 and firms need to provide services which meet the demands of these new clients who understand how to make technology part of their decision-making process. 2019 appears to be following the trends of 2018 with volatility controlling the way the markets are trading.
This is another reason for investors to look at working with locally based investment firms, not just because of the regional investment knowledge, but because of the financial strength, these firms offer. On-going volatility puts substantial pressures on the bottom line of trading firms. The 2018 losses of some very well respected hedged funds, demonstrates the risk associated with trading.
Dramatic switches between risk-on and risk-off trading require very well capitalised firms with skilled individuals who have the experience to design and implement the systems which manage modern trading. Many assets are bought and sold based on sophisticated AI systems. Trades are placed in milliseconds, quick enough to avoid losses or create profit. However, it requires in-depth knowledge to build the AI systems and the firm has to have deep liquidity to allow investors to access and trade at a good price.
The capitalisation of firms like ADSS, the investment in new tech and the local market knowledge gives them a headstart on international competitors. They can provide sophisticated access to the markets investors are looking for. So, how should investors approach 2019. It is not possible to predict whether the US and China will end their trade war, or what will happen in Europe with Brexit—or even, at this stage, be able to say whether any of the outcomes will be positive or negative.
This means we will most likely see ongoing volatility with the US dollar, the euro and the British pound, but in other assets and markets, there will still be genuine value. The most important piece of advice Ghanem gives is to have a very good understanding of risk. It is vital that you do not over-leverage and are not be driven by the market.
To be able to do this you must always invest in yourself—through education and training. The good news is that from emerging markets through to distributed ledger technology there will be opportunities to maintain and grow value. If investors pick the right partner, secure and forward thinking, they will be able to make the most of the volatility and create the returns they are looking for.