In our previous article "Fundamental outlook for
(For the uninitiated, "short-selling a stock" is simply borrowing the item at a particular price on the basis that if the stock price reduces your obligation is simply to give back the stock and not the monetary value for which you borrowed it.) So given the increased focus of international fund managers on this market, such mechanisms are likely to become increasingly important for the
When compared to competing global markets, the relative riskiness of the
Although risk as defined by standard deviation is likely to decline once the local market matures, the development of a healthy derivatives market as an efficient shorting mechanism is an important fact that acts as catalyst to speed up the process.
Established in 2008, Nasdaq Dubai remains the only equity derivative exchange in the
The Abu Dhabi Securities Exchange also plans to add derivative products to its portfolio in the near term and, in
Hedge funds by their very purpose generally both long and short the market — in some cases even market neutral — and most seek mitigated or even positive exposure to systematic risk. Many hedge funds exploit arbitrage (each way) opportunities and, as such, may be low-risk investments. In case of macro focus, rather than micro, managed futures could also prove to be an attractive alternative asset class because correlation with equities is low and often negative, and correlation with bonds is less than 0.5.
If used for purposes other than hedging, many alternative assets have potential for generating significantly higher returns. However, risk will be increased is leverage is utilised. In most cases, though, derivatives (contracted pricing) are utilised to limit riskiness and may be combined with traditional assets to increase risk-adjusted return. Increased hedge fund activity can be especially promising in a market dominated by traditional, long-only, market-oriented and largely-passive portfolios of stocks and bonds — which may be susceptible to bubble formation. However, the situation as it pertains to local markets is the "chicken and egg" scene. In order to gain hedge fund participation, which could serve to increase volumes and liquidity whilst decreasing risk, the local market is unlikely to enjoy such presence unless short sale mechanisms are introduced.
The writer is a risk officer at
Most Popular Stories
- Doctor Who Christmas Episode Begins Production
- HCL America Adding 1,200 IT Jobs
- Medical Mfg. Jobs Coming to Dayton
- Longtime Unemployed to Get Help in Las Vegas
- Michael Jackson, Freddie Mercury on Previously Unreleased Queen Cut
- SpaceX Aims for Predawn Launch on Saturday
- Women Key to Democratic Party: Clinton
- U.S. Chamber Caught Up in Tax Inversion Question
- Feds Won't Say How Many Border Crossers Jailed
- Christie Didn't Order Bridge Shut Down, Feds Say