Equitable sufferers face a long, hard slog

Missing out on the Middle East

With the high price of crude, the transfer of wealth to the oil-exporting nations amounts to an astonishing 3.5% of global output - a sum to be measured in the hundreds of billions of pounds. A just-published study by the McKinsey Global institute says oil-exporting states will see their assets grow by $10,000 billion over the next five years with oil at $70 a barrel and by $12,200 billion at $100. But given how much of this money is pouring into the Middle east, it is remarkable how little interest there is in the uK and elsewhere in investing in the region. investors may be missing out. At a Citywire seminar for wealth managers this week, Mark Kombas of Société Générale asset Management (SGaM) described the stock markets of the Middle east (excluding israel) and North africa as an outstanding investment opportunity. His enthusiasm is born of the fact that almost unimaginable sums of money are pouring in, but in contrast to previous times it is being put to much more sensible use. Almost all the states in the region are investing in infrastructure, with a planned spend in the Gulf region of $1.5 trillion over the next five years, and developing their economies for when the oil finally runs out. Growth rates are consistently high, and look set to remain high for years to come, even if oil drops back from current peaks.

Perhaps the biggest deterrent is the politics. The instability of the region, gives it a woeful image but the reality is that the conflicts are very localised. economists also worry about inflation and the thought that growth will have to be slowed if the countries are to regain control of their economies. But that risk is perhaps an inevitable consequence of the oil riches rather than an obstacle to continued growth.

Certainly, that is what SGaM has found. its first fund in the region, launched in 2002, shows a cumulative return since inception and net of charges of 643%.

Injustice to the hedge funds

While it is true to say of hedge funds, as various reports did yesterday, that in the first six months of 2008 they have had their worst decline in 18 years as measured by an index compiled by Hedge Fund Research of Chicago, it nevertheless does them an injustice. A blanket index is a pretty meaningless concept in an asset class containing so many different types of fund. It's like aggregating the price rises of apples, oranges, bananas, and blueberries and the falls in strawberries and pineapples to conclude fruit prices had fallen. The other injustice is that hedge funds ask to be judged over the cycle of a bull and bear market because one of the key things they offer is preservation of capital in bad times. It is this ability, rather than a promise to shoot the lights out on the upside, that delivers the longrun superior performance of the best funds. This is what they are offering now, for although the headlines suggest doom and disaster, the six-month fall revealed by the index is only 0.75%. that is a lot less severe than the falls in equities, bonds and property in the same period.

While some of the smaller funds are losing the will to live, such consolidation and closure is normal in any business which has grown as rapidly as this has. So the story of the first half of the year is really that in spite of a few high profile disasters most hedge funds are doing what it says on the tin and performing much better than expected.