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The GCC is famed for its access to enormous amounts of excess liquidity due to the high price of oil. Bahrain, UAE and Qatar are now seeing professionalism from both regulators and service providers grow steadily.
If current trends continue, these countries will most certainly emerge as hedge fund centres rising with time to the level of Singapore, Hong Kong and even London and New York.
For a region flush with oil money, stock markets seemed the best way of multiplying returns from investment until the overheated markets burst and thousands of investors got burnt. After the crash of 2006, markets never fully recovered and this provided the impetus for hedge funds to move in and capture the conservative section of investors.
Few if any surveys have been conducted of investor attitudes in the Gulf, but even without these, it is possible to make both general and specific comments about the drivers of alternative investment. There are good and growing opportunities for hedge fund distributors in the Gulf region despite the current high returns from equities because investors/speculators increasingly recognise that such exceptional returns cannot be the norm.
Furthermore, there are still concerns arising from memories about the durability of the some of the region's financial structures. Equally, in an area where a single commodity - oil rules the roost, there is a growing enthusiasm to diversify away from an oil-dependent economy.
Swiss bank Mirabaud forecasts that hedge funds will become increasingly attractive to the region's ever-more sophisticated regional investors, especially given the high levels of excess liquidity in the Middle East.
When one looks at the issue globally, one sees hedge fund centres have emerged from the most sophisticated financial centres, such as New York, London, Hong Kong and Singapore. The relevant defining attribute of each of these locations is the maturity of their capital markets. While Middle East capital markets have not yet reached the same level of maturity, they are quickly moving in the right direction. In the UAE, Bahrain and Qatar, in particular, the markets and the level of regulatory oversight continue to achieve significant progress. The Dubai International Financial Centre has even taken the step, through its regulating body the Dubai Financial Services Authority, to create a Hedge Fund Code of Practice, giving legal weight to the effort to make Dubai a centre in the hedge fund industry.
Increased institutional investment in the regional capital markets, especially the UAE, is another sign of the maturity of markets here, Mirabaud's research found.
Bahrain totally dominates the regional hedge fund industry.
Increased investor risk appetite and a surge in high-net-worth individuals (HNWIs) in Bahrain have prompted the Central Bank of Bahrain to revamp laws dating back to 1992. The new rules classify hedge funds as 'exempt', which makes it much easier for them to set up shop in Bahrain.
The CBB expects the hedge funds numbering about 57, currently worth a collective $2.6 billion, to increase in number by 10 per cent a year.
Globally, at a time when most traditional investments are generating low levels of returns, institutional investors are increasingly attracted to alternative asset classes such as hedge funds.
Middle East institutional investment in hedge funds could surge almost fivefold to $140 billion by 2010 as Arabs look for alternatives to invest bumper oil revenue, the Bank of New York said.
State owned investment firms in the six GCC states will account for the bulk of the increase, the bank's managing director, David Aldrich, said in Dubai, presenting the findings of a study on institutional demand for hedge funds.
"Middle East institutions are adopting a more aggressive approach to investment," Aldrich says. "You've got big, government-backed investors who are not constrained by investment fund trustees."
Governments of the Middle East's top energy exporting nations are reaping windfall revenue from a near tripling of oil prices since 2001.
Institutional investors in the Middle East have funnelled about $28.9 billion into hedge funds, eight per cent of the global total of $361 billion, according to the bank's study, conducted with US-based consultancy Casey, Quirk & Associates.
That volume will surge 384 per cent to $140 billion by 2010 and account for 14 per cent of the $1 trillion in institutional investment in hedge funds by then, the study forecast.
