Ep 49. The Long-Short |Is the hype around UAE's growth as a hedge fund hotspot justified?
Published: 07 December 2022
The Long-Short is a podcast by the Alternative Investment Management Association, focusing on the very latest insights on the alternative investment industry.
Each episode will examine topical areas of interest from across the alternative investment universe with news, views and analysis delivered by AIMA’s global team, as well as a host of industry experts.
The past year has seen plenty of noise regarding alternative investment funds migrating to the United Arab Emirates with some of the largest names in the industry among those setting up shop in the region. To get an on-the-ground report on whether we should believe the hype The Long-Short speaks to Muneer Khan, Middle East Managing Partner at Simmons & Simmons, who joins to discuss the buzz around growth in the Middle East.
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Hosts: Tom Kehoe, AIMA; Drew Nicol, AIMA
Guests: Muneer Khan, Simmons & Simmons
Tom Kehoe, AIMA 00:02
Hello, and welcome back to The Long-Short. I'm your host Tom Kehoe.
Drew Nicol, AIMA 00:05
And I'm Drew Nicol.
Tom Kehoe, AIMA 00:07
Many column inches have been dedicated this year to developments taking place across the United Arab Emirates.
Drew Nicol, AIMA 00:14
The past year has seen plenty of chat regarding hedge funds and alternative investment funds more broadly migrating to the region and what appears to be a real charm offensive being mounted by the region's leadership to attract world-class businesses to relocate there, including FinTechs, digital asset firms, and asset management firms.
Tom Kehoe, AIMA 00:33
So, are we looking down at a potential new global hedge fund hotspot? Or is this a false dawn for the region?
Drew Nicol, AIMA 00:43
To help us understand this more, we are delighted to be joined by Muneer Khan, who is Middle East Managing Partner at Simmons & Simmons.
Tom Kehoe, AIMA 00:50
Muneer, you're very welcome to The Long-Short.
Muneer Khan, Simmons & Simmons 00:52
Thank you. It's good to be here.
Tom Kehoe, AIMA 00:54
So, Muneer I had the pleasure of staying in the region last week having been invited to speak at a conference in Dubai, where I spent two days and then a further two days in Abu Dhabi meeting with representatives from across the Alternative Investment Industry. I sensed a real buzz about the place. Some of the world's largest hedge funds have moved to the region and others are exploring options to do so. I also heard about FinTech and technology firms migrating to the region in large numbers. What can you then tell our listeners about these developments?
Muneer Khan, Simmons & Simmons 01:26
So, I think the first thing is that because we're at the coalface often advising a number of these firms, even before they make the decision as to whether to set up here in the UAE. We have, I suppose, the direct data to back up the claims. And what I can say is an over the last couple of years, in particular, throughout the pandemic, we've seen a huge number of alternative asset managers setting up here as well as FinTech firms and digital assets firms. So, the trend, or what is being talked about, is a real phenomenon. And we've been extremely busy advising a number of these firms on their strategy for the Middle East, using the UAE and particularly Dubai, as a hub.
Drew Nicol, AIMA 02:17
So, the natural follow-on question here is, very simply, what's driving this migration? Because I've been hearing about it at least all year, if not before now, but are you able to just point to a few key drivers?
Muneer Khan, Simmons & Simmons 02:35
Yeah, I think that there are various pull factors and various push factors involved. So, undoubtedly, what we've seen is the pandemic accelerating these moves. One of the push factors has been increasing difficulties to operate businesses elsewhere for different reasons. One has been the response to the pandemic, some of those responses have been very strict and restrictive, making it difficult for people, including portfolio managers to live their lives and travel freely in and out of the jurisdiction. And the UAE, Dubai in particular, has not had that issue. So initially, there was only one lockdown in the UAE at the start of the pandemic in early 2020. But after that, the leadership here was very clear, and there were no further lockdowns. And then the other aspect is undoubtedly around tax and the response of various governments to the pandemic, and how that was having an impact on regulation and tax in particular. Some places are just becoming more difficult and expensive to operate. I think it ties in with the cost of living as well. And so, I think Dubai positioned itself very well. It is attractive as a location. And what we started to see early in the pandemic was managers who are our clients talking about PMs (Portfolio Managers) who wanted to be based in Dubai. And so, there was a real period of time where PMs wanted to be based in Dubai and were proactively asking.
I think what I would say is the UAE authorities, the DIFC (Dubai International Financial Centre) in particular recognised that, and have essentially rolled out the red carpet. And there are various things we can talk about during this podcast, but one of them has been the golden visa scheme, which has really had a huge impact. When lots of places around the world are actively closing their doors to immigration, I think the situation in the UAE is the absolute opposite, especially because skilled workers and skilled finance professionals, including PMs for hedge funds, as well as FinTechs, and anyone involved in the digital asset space.
Tom Kehoe, AIMA 05:09
Just to clarify the point on tax. Clearly very competitive tax or no tax at all, the personal income tax that is, and then court operation tax. Has that been introduced, that there is no corporation tax? What can you tell our listeners about tax?
Muneer Khan, Simmons & Simmons 05:29
The first thing to say, I'm not a tax expert, I focus more on law and regulation. But obviously, it's an important factor. The simple explanation is that yes, the UAE federal government is introducing corporate taxation next year, from June 2023 onwards. But the applicability of the tax will very much depend on various factors, in terms of what kind of business you're involved in, the turnover of the business, and whether the income is being generated in the UAE or outside the UAE. The other point to bear in mind is that the financial free zones, the DIFC and the ADGM (Abu Dhabi Global Market) have agreed on tax-free guarantees; the 'holidays' is the language of 50 years from their establishment. And what we understand is that this will be respected. And so, if income is being generated, for example, in the DIFC, that should not be subject to the new corporate tax. And so, businesses who are using the DIFC as an international hub, with income being generated elsewhere, may be able to structure their arrangements to be extremely tax efficient.
Then going to your question about personal income tax. There is no personal income tax. So that is zero. And I think that's been a huge driver for highly paid individuals such as portfolio managers who have been looking at where to base themselves and their families. And, you know, this is where then we start to talk about some of the softer factors such as schools, education, healthcare, lifestyle, and many people will know about that already if they've visited the place.
Tom Kehoe, AIMA 07:32
Yes, it really feels like there's a real strong charm offensive being mounted by the leadership in relocating and attracting the world's best businesses to the UAE. And you've mentioned many of these incentives that have been received, the lifestyle tax. Is there anything else in there that would incentivise a firm or business to relocate to the region?
Muneer Khan, Simmons & Simmons 08:05
I think what we've seen is, and what's been different about this period of time over the last few years is a real war for talent. Particularly with portfolio managers, there are issues to do with retaining that talent in certain parts of the world, where these individuals want to move away from those locations. And, there's an issue to do with attracting them. So, what I would say is that Dubai has a lot of aspects, in particular Dubai, which are attractive. We've talked about tax, that's one aspect, but also the other lifestyle factors, the central location, which makes it easier for a number of these individuals to trade in Eastern and Western markets on the same day, which is important. And also, another factor is the ease of doing business and the ease of travelling in and out of the jurisdiction. So, Dubai in particular is very well connected internationally, in terms of logistics, flying in and out. It has through its airline, Emirates, more direct connections to around the world than probably any other airline, and Dubai is the hub for that airline. So, for a lot of people who are mobile, they have family around the world, they come from a particular place, they have a business in another place, for them, the ease of being able to travel quickly and efficiently, in and out of a location is really important. And this ties into the golden visa scheme as well because the golden visa scheme, which is a 10-year visa, five or 10 years depending on the type, makes it easy to travel in and out without restrictions. and without any minimum requirements in terms of a period of stay, or frequency of visits,
Drew Nicol, AIMA 10:08
It's interesting you raise that actually because the soft aspects of what makes a region attractive, these things around its ability to get in and out, I know that people we've been speaking to this year have found particular troubles in getting to certain hubs in APAC, for example. And then that really has had a detrimental impact on their ability to attend conferences, meetings, and all those things that, although that may be less important than overall regulation, do add up to how attractive a region is, and whether they are going to continue or expand in their offices there. But I just wanted to get back to something we said before, because we've been talking about the interest by alternative investment firms relocating, but I just wanted to zero in on that and be maybe a bit more specific about what types of funds are we talking about here?
Muneer Khan, Simmons & Simmons 10:59
We've seen all sorts, but in particular, the multi-managers, the multi-strats, I think, these firms who have large platforms where they are basically providing a platform to PMs, to come in and plug into that infrastructure that they've created, have been particularly interested in Dubai and the DIFC, and we have a number who have either set up or in the process of setting up. We do have other firms as well, you've mentioned other sectors or sub-sectors like FinTechs and digital assets. So, firms who are looking to trade digital assets have also been looking very closely at Dubai in particular. And so, I would say a combination of standalone hedge funds, the platforms, as well as the digital asset firms.
Tom Kehoe, AIMA 11:56
Muneer, the types of hires being made by these firms looking to relocate, can you elaborate on, you know, who is being most sought after and who is migrating to the region?
Muneer Khan, Simmons & Simmons 12:11
So, it's a combination, I think Dubai has always been a hub for, certainly in the last 10 to 15 years, capital raising. So, investor relations, marketing, capital raising, but what's changed more recently, is that it has also started to become a hub for portfolio management, as well. So senior experienced portfolio managers who are managing significant books of business have been moving to Dubai, in particular from Asia. But, we've also seen it in the US and Europe as well. And for some of them, what I'm hearing is, especially also junior traders as well, analysts, researchers, and all the way up the hierarchy in terms of experience, but for some of the more junior ones are making a significant difference in terms of take-home pay. And, you know, nowadays that can't be underestimated, especially in the US and UK.
Tom Kehoe, AIMA 13:22
Yep, a sharp contrast to what's happening in this part of the world and in the US for sure. And so then, if you're a hedge fund or an alternative investment fund, what are the steps that you should know should be aware of? Should you want to set up an operation in the UAE?
Muneer Khan, Simmons & Simmons 13:42
So, I think the first thing, as would be the case anywhere you wanted to set up, would be to understand what it is exactly you want to be doing in terms of your activities. Is it just a marketing hub? Or, are you looking to do portfolio management as well. That obviously has an impact on the licensing requirements, and the amount of infrastructure capital personnel required. So obviously, the more complex the business, the more controls, and requirements there would be. That's the first thing.
The second would then be to think about where exactly you want to be based. So, in the UAE, there are a few different options. What we have seen is that the vast majority of our clients or hedge fund managers have set up in the DIFC, which is the Dubai International Financial Center, for various reasons, but there are a few different options. And so, one thing is to look into those. One of the factors would be where your people want to be based, frankly, so if this is a decision that has been driven by PMs for example or investor relations, you need to ask them. Okay, where do you want to be based? Which part of the UAE do you want to be based in? And that's where it could be various factors, including individual lifestyle choices. So yeah, there are various things to think about.
In terms of the process, it is broadly similar. If you are setting up a regulated entity, which would be the case if you're a hedge fund manager looking to do portfolio management or marketing activities. And then there is an application process, so part of it would be setting up an entity, corporate and local entity, or a branch. And then part of the process is to apply for a license to the relevant regulator. There are various practical things you will need to think about as well, for example, lots of firms are moving here. So, office space is starting to become a bit of an issue. So, there are certain things that you might want to start thinking about sooner rather than later in the process. Practical things, setting up corporate bank accounts, there are various parts of the process. And a good adviser would be able to essentially help you to ensure that you're getting the timing and sequencing of the process, right. And it's being done in an efficient way, with certain things or certain elements of the process being run in parallel.
Drew Nicol, AIMA 17:25
Now the big aspect of this conversation that we've not touched on fully yet, although we've referenced it a few times, is the point around regulation in the region. And something that always comes to mind for me, when we hear about this big influx of businesses to any new region is, I always wonder how the infrastructure will cope. And by that, I also mean local regulators and authorities. So just to begin with then, are they adequately equipped to deal with this surge in interest from the fund's industry let alone everyone else?
Muneer Khan, Simmons & Simmons 17:57
It is a very good question because I certainly think that Dubai, they have a plan. When I talk about Dubai, I mean DFSA (Dubai Financial Services Authority) which is the regulator for the DIFC. So, the Dubai Financial Services Authority, they have a longer track record. They've been in existence since 2004. And the DFC is now the largest financial services centre in the MENA (Middle East and North Africa) region. So, the most number of regulated firms, the most numbers of employees, and various factors, the most number of them are service providers, and AUM, which is been managed from here or advised through here. So, they're the most experienced and you do need to look at things like experience, and resources.
But you're right. I think the flow has been so high recently that the regulators have also been really busy. In particular, the DFSA. I think they're scaling up. We will put it that way because it's not just hedge funds, it's also FinTech, and it's also digital assets. So, there are various flows. Interestingly, if you look at the data, whilst some other financial centres have shrunk, or pretty much stayed static throughout the last couple of years, because of the pandemic, the DIFC in particular continues to grow significantly year on year growth, which is phenomenal, really, f you think about what's been going on in the world. And that shows you how that strategy of keeping the place open, focusing on the strategy of vaccination and sensible sort of social distancing or mask measures, but keeping the borders open and keeping business open and running, and keeping applications and the regulatory process running. has made a massive difference. They're reaping the benefit of that now, for sure.
Tom Kehoe, AIMA 20:03
And Muneer, you touched on digital assets and crypto. That's certainly an area of interest. What can you then tell our listeners about the real frenzy of activity that's happening across the UAE in this area?
Muneer Khan, Simmons & Simmons 20:19
Yeah, it’s another very interesting area and a successful strategy, I would say in terms of positioning of the UAE. So, in the UAE, you have three I would say main regulatory regimes that are relevant for financial services, including crypto. You've got the DIFC, which I've already mentioned financial free zone. In Dubai, you've got the Abu Dhabi Global Market, which is another financial free zone, based in the Emirate of Abu Dhabi. And then you've got the onshore, when we talk about onshore, it's slight misnomer, but what we mean is the UAE excluding the DIFC and the ADGM. And in the Emirate of Dubai, we have a new phenomenon, which is a startup regulator, which was established only in February this year, called VARA, or the Virtual Assets Regulatory Authority. So as far as I'm aware, I'm not sure if this is actually still true, it is the only financial services regulatory regulator in the world that has been created specifically for virtual assets regulation. So that was launched in Dubai, in the Government of Dubai initiative in the Emirate of Dubai, to focus on virtual assets.
So. we've got these three very different regimes. But, it also, gives you options. One of the things I would say is that it's very important for anyone in this space, whether it's an exchange, whether it's an asset manager, or hedge fund, or somebody else in the value chain, to have a very solid understanding of each regulatory regime before they apply. Because what we have seen is certain firms making applications and then discovering later that it might not be completely 100% appropriate for what they're looking to do. So, one of the things we've been doing is we've been helping our clients in this space, which includes large exchanges, as well as hedge fund managers active in the space, to understand the regulatory regime. What they can and can't do, and whether it's optimal for what they're looking to do depending on the nature of their business, their client, their customers, their clients, investors, and also the type of activity and the type of assets they want to be able to trade with. So yeah, high level. And, as I said, you need to really look at what you're doing. And then you can match up which one of the regimes or potentially multiple regimes would be suitable for your business.
Drew Nicol, AIMA 23:15
Just to expand on these points a little bit more, if you'll indulge me, I just want to take a step back, because, obviously, I mean, Tom has mentioned that he was out there last week. And we've heard pretty much-unadulterated positivity from the growth in the region, which has been very interesting to hear. But Dubai has sort of, or the region as a whole has not necessarily come about overnight. And there have been efforts to grow the region or attract big names to the area before, most notably around the time of the GFC (Global Financial Crash), and then, there were issues that came up because of the poor timing there. So just to sort of zoom out a little bit and look at this in maybe a broader context. Do you believe this time will be different?
Muneer Khan, Simmons & Simmons 24:12
I hope so. I do think it is different this time. As I said, maybe it's a perfect storm. Maybe there are various elements to this that have all come together at the same time. But I do think this time is very different to before. And you know, one of the basic points is that the regulators and the jurisdiction is more mature. I mean, it's an emerging market. It is growing, and it develops rapidly, and that includes the legal and regulatory regime, as well. And I think that now is the right time. And I think the pandemic also exposed the fallacy of some of our preconceptions. about how solid and dependable different jurisdictions are in this area. So, I think that's also something that Dubai and the UAE authorities have shown that they have been able to handle well, in a balanced manner. And they've shown their competency in that regard. I think this time, my sense is very different. I think the other factor for hedge funds, which is different this time, is that we're looking at not just investor relations and marketing and capital raising hubs, we're looking at proper portfolio management hubs. And that's to do with human capital, talent attraction, and retention. That's where those individuals don't just look at, your tax. They look at everything, all aspects, and that's where I think that things are different this time.
Tom Kehoe, AIMA 26:01
So, if we were to then have you look into a crystal ball, say and look at the next 5 to 10 years, you talked about Dubai and the UAE as a hub for alternative investment funds, what potential then could you see in terms of how this jurisdiction could grow when we think about representation for alternative investment funds that might migrate their to set up a business?
Muneer Khan, Simmons & Simmons 26:31
So, based purely on what we're seeing now, in terms of numbers, numbers of applicants, number of firms that have set up and the growth trajectory of some of these firms and how they've grown over the last couple of years? I would say that if things continue, as they have done. even not as fast as they have been over the last couple of years, within the next 5 years or so, I think Dubai will emerge as one of the global hubs for hedge funds. I mean, it already is the largest hub in the MENA region, which has a large region. And if you look at the Middle East, and Dubai in particular, it is being used as a gateway by various industries for Africa, and Central Asia as well. So, if you look at that, the region, Middle East, Africa, Central Asia, and you see that Dubai is the largest hub for alternative asset management already. And it continues to grow, and we've got a pipeline of several hedge fund managers who are all in the process of setting up. You just roll that forward, four or five years, and you can, all of a sudden, start to see that it's a very significant global hub.
Drew Nicol, AIMA 27:57
So, forgive me, but I do have to play devil's advocate a little bit here. Is there anything that could derail this progress? Are there any headwinds, any hurdles that we should be aware of sort of either in terms of the region's internal development or just shifting macro trends?
Muneer Khan, Simmons & Simmons 28:16
You know, you can’t predict everything. Obviously, we've seen that in the past, it is very dangerous to try and predict global markets, but just in terms of what's going on now, global headwinds, geopolitics in Asia, the political process in the US, difficult times ahead economically in Europe and in the UK. I think the UAE is well positioned. I mean, obviously, there is a transition from carbon and oil and gas-based economies to cleaner energy. But that transition is going to take time and the UAE is actually well on the way in terms of solar, and nuclear, but in the short term to medium term, I think it will be generating a lot of revenues that need to be invested, and where economies need to be diversified. And it's not just the UAE, we're talking about the GCC region and wider region where these are developing economies that are very focused on diversification. One of the key areas of diversification is financial services and asset management. And they are very focused on this.
So, obviously, you cannot predict global macroeconomic trends exactly, but from what we see and from how markets are positioned, I think this is a longer-term trend. And what we're seeing also with the visa programs is that the governments here, and the UAE government, in particular, is very focused on that they don't want the UAE and Dubai to be transient as it has been in the past. They want the people who are coming to stay and put roots down. And that involves the ability to buy property, longer term residence visas, which are renewable. So effectively long-term residency, and remain tax-friendly, to continue to make it easy to do business.
One of the final things I would say that I've certainly experienced this working with the authorities here is that they are very open to receiving and acting on feedback from the market. The DIFC and the ADGM are examples of jurisdictions that have been created from scratch, following discussions and soundings with the industry. So, you don't get a closed door here. As an industry participant, you have an open door and an open dialogue and people who really want to learn about the business and what they need to do in order to make the UAE attractive as a location for business. So, with that mindset, I think, yes, events can come along, and it's important not to be complacent. But I don't think the authorities here are complacent. I think they want to continue on this journey to make the jurisdiction a successful financial services hub. And the hedge fund sector I think, is going to be an important part of that equation.
Tom Kehoe, AIMA 31:53
Fascinating insight. And so, if this was something that would pique one's interest then, where could prospective firms or persons then find more information on moving to the region? Is this something that could be found on the Simmons and Simmons website?
Muneer Khan, Simmons & Simmons 32:13
We have information on our website, and the regulators and the authorities have information on their websites as well. There's lots of information out there. But really, I think the best way is just to have a chat, because every business is different. One of the things I realised over the years is everyone has a kind of nuanced objective of what they want to achieve out of relocation or a move to a new base. So, I would suggest talking. And I'm very happy to talk to anyone who's looking at this actively, and then provide information which is relevant.
Drew Nicol, AIMA 32:55
Muneer, this has been really fascinating, especially for someone who didn't get the nod to go out last week, but I heard nothing but positive things. And I think as you say, we can't necessarily predict the global trends in the next 10 years but there is undoubtedly a lot of interest in the region. So, all that is left to be said, is thank you so much for your time and for joining us on The Long-Short. We'll, of course, be keeping an eye on developments in the region and I'm sure we will be calling on you in the future to hear more about this new fund hotspot. Thanks so much.
Muneer Khan, Simmons & Simmons 33:24
You're welcome. It was a pleasure.
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