Dubai Creates New Fund Class To Lure Asset Managers

Dubai is changing its financial rules in an effort to attract more asset managers – particularly those serving the richest and most risk-tolerant investors, such as hedge funds and private equity funds – to base themselves in the emirate.

The rules create a new class of funds that can be domiciled in the Dubai International Financial Centre (DIFC), facing less stringent regulation and thus lower costs than existing funds.

Authorities hope this will boost the DIFC’s growth as a domicile for funds, which has lagged other areas of the emirate’s rapid financial development over the past decade.

The DIFC has boomed since it was set up as a financial free zone in 2004, becoming the Middle East’s main banking hub. The number of registered firms operating there jumped 14 per cent to 1,039 last year.

But the DIFC has not come close to competing with the likes of Luxembourg, Dublin and the Cayman Islands as a top domicile for funds. Only about nine funds have been domiciled in the DIFC since its current funds regime was introduced in 2010, compared with hundreds established in the leading centres.

That is partly because Dubai still lacks an extensive “human infrastructure” of financial lawyers, custodians and other professionals to compare with the other centres, and because of the costs of meeting regulatory requirements.

The new rules from the Dubai Financial Services Authority (DFSA), which were published this week and will take effect on Thursday, seek to cut costs by creating a class of funds that can be offered only to experienced professional investors and so need less regulation.

The qualified investor funds (QIFs) can be offered only through private placements, rather than public offers, and can have no more than 50 investors, the DFSA said.

Minimum subscriptions to QIFs must be $500,000. That is lower than the $1 million minimum initially proposed by the DFSA in a draft of the rules for public consultation earlier this year.

The advantages of QIFs include not having to file interim reports on their operations, only annual reports; flexibility in appointing custodians; and exemption from some investment restrictions. For example, a QIF can invest in a fund of funds, while funds of other types may be prohibited from doing so.

While it is likely to take years for Dubai to build the human infrastructure which the European centres have, many asset managers think the emirate could prosper as a fund domicile in the long run because of its role in handling the Gulf’s oil wealth and its proximity to major emerging markets such as India.

QIFs may appeal in particular to the “family offices” which manage the money of the Gulf’s wealthy business dynasties and are increasingly establishing presences in Dubai as their managements become more professional.