Bahrain to encourage hedge fund expansion

Middle East Investment Summit, Bahrain, November 2009


Sheikh Al-Khalifa (above) says Bahrain is well placed to encourage the growth of the alternative asset management sector, particularly funds and managers that want to access other Gulf Co-operation Council (GCC) countries. At present over 25% of gross domestic product (GDP) of Bahrain comes from financial services, a much higher percentage than oil. He also says Bahrain is a good base for funds to access other states in the Middle East and North Africa.

Sheikh Al-Khalifa made the comments at the Hedge Funds Review Middle East Investment summit in Bahrain in November 2009.

At the moment there are close to 3,000 fund management operations in the region, managing $15 billion worth of assets. Sheikh Al-Khalifa says Bahrain is at the centre of a $1 trillion economy represented by the GCC countries and offers a good base from which to access these markets.

Bahrain’s developed infrastructure and services offer fund managers a “strong base of operations. Bahrain provides opportunities for fund management and alternative assets industry as they explore the landscape post-financial crisis. Bahrain has much to offer.”

Although banks in Bahrain and in the GCC were relatively sheltered from the worst impacts and fallout from the financial crisis, they did not escape entirely. “Banking was less devastated here than in developed countries. But the crisis has shown us that diversification is needed in the financial sector,” notes Sheikh Al-Khalifa.

“Diversity helps cushion shocks,” adds Sheikh Al-Khalifa. He advocates the advantages of a well-diversified financial services sector, encouraging non-banking areas such as insurance and asset management. He says he believes the asset management industry in particular offers “enormous positions for the future”.

Recent changes to Bahrain’s rules and licensing of alternative asset management should “facilitate growth”, he says. A regulator that is receptive to the needs of the alternative asset management industry should encourage this growth, Sheikh Al-Khalifa notes.

Bahrain’s role as the leading financial services centre in the GCC, says Sheikh Al-Khalifa, is secure and based on its pioneering prudential standards for Islamic financing as well as its conservative approach to financial services, and in particular banking. While in the past these policies may have been criticised for being too restrictive they are now seen to have been a wise policy, he says.

“Now bankers and others recognise the wisdom of what we did. It is now considered best practice and regulation in other parts of the world is moving in the same direction as what we have here,” he concludes.

Growing fund industry in kingdom with robust regulatory framework

Bahrain’s fund industry began in the 1980s with the first Bahrain-domiciled fund launched in 1984. Formal regulations governing funds were introduced in 1992. This provided the stimulus for development of the sector and has helped to make Bahrain the Gulf’s regional fund centre.

Streamlining and authorisation of commercial registration processes for mutual funds and the creation in 2004 of a corporate special purpose vehicle better suited to mutual funds than the corporate vehicles previously available have pushed the industry’s growth.

Bahrain has over 2,000 registered funds of which over 100 are Bahrain-domiciled schemes and 43 Islamic funds.

The region presents significant opportunities for asset management companies and is still experiencing growth in the mass affluent category, in addition to the more established institutional/high net worth market.

There is a growing trend for investors to invest in regional asset classes as regional markets develop. The increase in private and institutional wealth has been matched by an increased sophistication in customer needs and types of investment vehicles as more personal wealth remains and is invested in the region.

Bahrain has become one of the main destinations for Islamic funds. It is now a big driver for growth in the Kingdom for Shariah compliant investments. The most recent statistics indicate that half of all Muslim investors would put money in Islamic products when they are available if they offer the same or better returns and service standards than conventional products.

In May 2007 the Central Bank of Bahrain (CBB) issued a regulatory framework to govern collective investment undertakings (CIUs). The main objective of the legislation was widening the range of schemes permitted. The CIU rules provide for a full range of investment funds, catering to various categories of investors.

The framework also updated regulatory instruments governing mutual funds, to target professional investors by providing a more diversified range of CIUs including hedge funds, derivatives and alternative investment vehicles and by allowing single asset class holdings to be domiciled and offered in Bahrain, broadening the range of products available.

The framework allows for two types of CIU: retail CIUs, which may be sold to anyone but are subject to stringent requirements aimed at investor protection; and expert CIUs, subject to a minimum $10,000 investment rule and which may only be sold to expert investors.

Expert CIUs are also regulated but may fully invest in a wider range of assets including real estate and commodities and are subject to fewer risk-concentration requirements.

A third category, exempt CIU, is subject only to certain requirements as this category may only be sold to a restricted investor base (those with a minimum investment of $100,000 and with at least $1 million in financial assets). Exempt CIU rules allow the establishment of hedge funds and other higher-risk alternative investment vehicles to be domiciled in Bahrain.

Funds can be set up as an investment trust or special purpose vehicle. Regulatory changes also created a category of Shariah compliant funds and there are now 99 of these vehicles with $500 million in assets in Bahrain.

Of the total assets of the fund industry, assets of foreign funds registered in Bahrain for sale rose 134% to $13.34 billion in June 2008, compared with $5.69 billion in June 2007. The number of funds totalled 2,502 in June 2008 compared with 2,266 in June 2007.

There are over 2,636 funds authorised for distribution in Bahrain with assets of over $20 billion. Assets under management by Bahrain’s mutual fund industry grew by nearly 115% to $20.14 billion during the period June 2007 – June 2008, according to the most recent CBB statistics.

“We are observing a growing interest from regional specialised financial institutions that are actively involved in the structuring of mutual fund products in particular,” says Abdul Rahman Mohammed
Al-Baker, executive director of financial institutions. “While many are focused on investments based in the region, they find an added value in utilising the Bahraini CIU regulatory framework for the establishment of their CIU investment vehicles. This is due to the fact that the Bahraini CIU-domiciled vehicle has established a reasonably tested track record for its efficiency and suitability,” he adds.

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