Special Section

booms in beirut

by Alex Warren
written by Alex Warren

All that glitters
Luxury goods retailers have enjoyed a mixed bag of success over recent months, but show no signs of losing faith in the Lebanese market.
Money, they say, can’t buy you happiness. But few would disagree that it can buy you beautiful things, and fewer still that many beautiful things can be bought in Lebanon.
Whether it’s Swiss watches, French fountain pens, haute couture fashion or Italian-made private yachts, luxury goods have traditionally boasted an impressive record of success in a market with an insatiable appetite for high spending
Today is fundamentally no different. The influx of wealthy Gulf tourists and the redevelopment of Downtown as the natural habitat of high-end brands has ignited a lucrative retail boom in recent years, with Beirut inking its name back on to the regional circuit.
Yet while Lebanon has plunged into political uncertainty and economic stagnation over the last fourteen months, other retail centers – especially Dubai – have been sullying Beirut’s crown as the king of luxury retail in the Arab world.
At the heart of the current difficulties is struggling consumer confidence and a drop-off in the numbers of affluent tourists, but distributors and agents are not giving up on the Lebanese market. For those who don’t faint at the price tag, Beirut’s shelves are still stocked with goodies.

Buying time
A classy timepiece has always been a symbol of status, which is probably why expensive watches are so popular in this part of the world. According to Global Refund statistics, watches and jewelry are the second most-bought item by duty-free shoppers in Lebanon, with only fashion and clothing selling more per year in terms of value.
With no home-grown Lebanese brands, distributors ship in and sell foreign makes of high-end watches. Switzerland is still the world’s most prestigious horological centre, and it’s telling that a disproportionately large 4% of Lebanon’s imports, according to customs statistics, originate in the tiny land of chocolate and cheese.
Unless traders in Beirut have been buying up some particularly expensive Gruyere, it seems reasonable to assume that the $423m of Swiss imports in 2005 was largely made up of jewelry and watches. And although Swiss imports seem to indicate a slowdown, only growing by 6% over 2004-5 compared to 82% over 2003-4, some retailers insist that the market is still there.
“Demand in Lebanon is actually outstripping supply for watches with complications,” says Zeina Kahwaji, General Manager at the Cadrans watch and jewelry boutique in Downtown. “Most of the luxury brands we distribute, let’s say Patek Phillippe or A. Lange & Sohne, are only produced on a limited basis. If we had more watches available, I’m confident we could sell them.”
For the priciest category – hand-made mechanical watches with complications – the market is made up of chiefly of Lebanese connoisseurs or collectors. “These are people who know what they want in advance, and are prepared to pay for it,” says Kahwaji. “They don’t just wander by the shop and walk in to buy a watch.”
To acquire one of these, which boast complications like perpetual calendars or moon-phase dials, buyers can expect to part with upwards of $10,000. Some brands don’t even bother producing steel watches, but go straight to gold to please the refined tastes and deep pockets of their clientele.


Not all of these precision instruments are flying off the shelves, though. Ziad Anan, whose Rolex boutique in Downtown is the official distributor of the brand, says that business has not been easy since he opened his doors in 2004.
“It’s too early to assess performance yet,” says Anan, “but the political situation since Hariri has clearly had an effect. Having said that, there’s a huge potential as far as luxury goods go, and many brands that were previously dormant have been reinvigorated and rebranded over the last few years. At the moment the influx of cash is almost all in real estate, but that’s indicative of future potential for tourism and retail. The market still has to mature.”
Other watch dealers tell a similar story, with several citing the extra problem of full or partial counterfeiting – something Anan describes as “rampant”. Still, anyone with the money to buy a $10,000 watch is presumably more interested in the genuine quality of the real thing than a cheap copy for the sake of the name.
Jewel in the crown
Watch-making may not be a Lebanese forte, but jewelry certainly is. Famous names like Mouawad, Tabbah or Chatila began trading in the 19th century, before moving their operations to Switzerland when civil war broke out in the 1970s. Although the domestic market here is now just a tiny fraction of their global reach, these renowned brands have put Lebanese jewelry on the map.


The retail market in Lebanon is estimated to be worth $350m annually, and employs some 4000 people. Exhibitions and trade fairs like Joaillerie Liban help to maintain Beirut’s image as the leading jewelry centre in the Middle East, as well as showcasing the most dazzling creations of local jewelers.
Whereas the watch market hinges largely on Lebanese clientele, some jewelers say their case is different.
“For top-end brands, like Piaget or Van Cleef, we’re especially reliant on clientele from Arab countries,” says Kahwaji. “But for all kinds of jewelry, these clients provide more business than the Lebanese.”


Some jewelry houses in and around Beirut have a privileged personal relationship with Gulf families who make specific trips to Lebanon to purchase custom-designed jewelry for a special occasion, whilst other high-class retailers feed off the tourist business generated in Downtown.
Consequently, the pickings from the summer and holiday seasons of 2005 were comparatively poor for some. One Lebanese jeweller which manufactures its own brand of fashion jewelry in cost-efficient areas like South America and Asia before shipping it in to Lebanon, reported a double-digit drop in trade over 2005. Whereas sales in Ashrafieh remained relatively strong, they said, business in Downtown and Verdun declined markedly.
Others are more upbeat. “Jewelry is a luxury item and so isn’t usually as influenced by the day-to-day political situation,” says Carole Rouhana, manager of Antoine Hakim stores. “For the Tiffany & Co brand, we’ve only seen a small drop in turnover due to the instability. I still think the market is promising. Buyers will keep coming here for our jewelry because we have more European tastes and styles than Dubai, for instance.”

Smokes and drinks
Of course, not every luxury item is something to hang on to forever. There are plenty of moneyed clients willing to shell out for pricey everyday consumables – of which one is particularly obvious.
“Lebanon is the best market in the region for cigars, and one of the best in the world”, says Wael Zeidan, Executive Manager of Phoenicia Beirut, which runs the La Casa del Habano cigar stores. With the airport cigar shop selling a remarkable 100,000 boxes every year, Lebanon counts itself as one of the top ten cigar-consuming countries in the world.
“Of course there’s a penchant for Cuban cigars here, but I would say that only around a quarter of buyers are proper connoisseurs and know what they’re doing,” says Zeidan. “Even fewer actually have their own humidors and know how to preserve a cigar correctly. For most people, it’s all about appearances.”


Cuban cigar prices in Lebanon are amongst the cheapest in the world, which also aids sales. Zeidan says the average cigar only costs around $7, with more expensive brands reaching up to $30 each.
One of these might be well accompanied by a swig or two of fine whisky, another product which has a reputation for doing good business in Lebanon. For drinkers seeking something more special than the usual fare lining the shelves of Spinneys or Monoprix, Chivas has just released a blend called “Royal Salute Stone of Destiny”. This 38 year-old tipple costs a whopping $1700 per bottle – or rather, per porcelain flagon with 24-carat gold-plated crest.

Float my boat
Watches, jewelry, cigars and whisky are one thing, but those wanting to make an even bigger splash in the retail pool should really consider a private yacht.
Dealers and agents in Lebanon for mainly European-made luxury yachts say that most buyers are wealthy Lebanese families (and a few politicians) with money to burn. Business is done through personal contacts, with most owners choosing to moor their floating chateaux at La Marina Joseph Khoury in Dbayeh.
Beirut Boat, the annual trade fair and exhibition in Lebanon for all things nautical, is scheduled for May 17-21 at the BIEL complex and promises to show off all the latest in seafaring decadence.
According to some dealers, though, the good times are drying up. “In 1994-5 the market was booming,” said one agent, who asked not to be named. “At that time I sold around 15 yachts a year. Then from 1997 onwards it started to decline. In 2004 I only three sales, but since February 2005 the situation has been so bad that I haven’t even sold a single boat.”
Others say that Lebanon is not an easy place to import boats. For a start, the exchange rate between the Lebanese pound and the Euro had long encouraged potential buyers to make their purchase in Europe and then bring their yacht across to Lebanon.


Second, although any boat over 15 meters long is not tax-applicable, a 10% VAT charge is imposed as soon as the yacht is imported into the country – a considerable sum given that a Lebanese buyer will shell out around $6m for a 30-metre yacht, and up to five times that for something bigger.
Even this is small change, though, compared to the ultimate luxury accessory – the private jet. For the growing number of companies and ultra-wealthy individuals choosing to fly in the comfort of their own planes, prices start at around $4m for an entry-level Learjet. Above that, the sky’s the limit.
Private jet activity is estimated to account for 10% of total traffic at Beirut’s airport, with this figure more than doubling in the summer months thanks to the stream of moneyed tourists flying in from the Gulf. Lebanese demand for private planes is relatively weak, according to one dealer, but more and more corporate clients are instead opting to charter planes – so-called “air taxis” – for their tailor-made trips.

Looking ahead
All this is only the tip of the luxury retail iceberg in Lebanon, which extends to high-end fashion, sunglasses, cars, pens and much more.
Although most of these retailers are finding life difficult at the moment, with low consumer confidence and a prevailing sense that now is not the right time to indulge in extravagant purchases, there is a long-term belief that more clement times will return.
The short-term economic climate may be uncertain, and the threat of increased VAT may loom large, yet none of these high-end retailers are planning to abandon the market. Some are even intent on expanding. Kahwaji, for instance, says that she ultimately plans to open separate boutiques in Downtown for each of the brands distributed by Cadrans.
If this optimism is justified, then expect to see even more over-the-top opulence on the streets of Beirut.

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Cover story

From one man to one brand

by Executive Editors
written by Executive Editors

The discreet automatic door on Rue Moutran creaks open. On the left is a tinkling, indoor waterfall and, at the top of the narrow flight of stairs, an immaculately groomed personal assistant glides out from behind a desk. Earl Grey? Sure, why not? Then it’s into a vast office where tan hides and white sheepskins mingle with bold timbers. Luxury and functionality set off by a vast, colorful canvas.
Tony Salameh enters and sits down. He looks at his watch. One senses the clock has started. The suit is dark blue with a discreet pinstripe, the tie a pale blue, jacquard weave. The knot is biggish and rakishly askew. The hair neat but ruffled with a few dabs of gel. The tea arrives, steaming in what appears to be a pewter beaker with a pleasing leather handle. Welcome to Tony’s world.

On the up
At just 39, Salameh is arguably; well surely it is beyond argument, the darling of the local retail clothing sector. In fact, let’s give him his geographical due and change local to regional. His Aïshti (“I love” in Japanese) outlets carry some of the world’s most visible and most famous, high-end fashion labels – Prada, Gucci, Fendi, YSL, Dolce & Gabbana, Missoni and the like – while Aïzone, a youthful diffusion label, caters to young hipsters.
In fact, Aïshti has metastasized into a lifestyle brand with, a beauty spa and the magazine. There are plans for an art gallery and even talk of a boutique hotel. The brand, has become a byword for luxury living and the gospel is spreading, especially in the Gulf, where Aïshti has a fervent and, more importantly, affluent customer base.
When Salameh signed the lease for the Moutran properties in 1999, he doubtlessly envisioned trading in the prosperous shadow of the luxurious Souks shopping development. The Souks stalled in the quagmire of Lebanese politics but the Downtown was offered another, arguably more lucrative lifeline as, in the post 9/11 world, Lebanon became the destination of choice for Arab tourists. Today, Salameh claims that roughly 45% of his customers are foreigners, the overwhelmingly majority GCC nationals.
And they love him for it. So much so, that he has opened a 2,500m2 Aïzone in Dubai and is planning two more outlets in the Emirate (one to open in September and another in February 2007) taking his total shop space there to nearly 10,000m2. He will also open in Amman in December and expects to be in Bahrain by the end of 2007. “We are committed to the Dubai projects. They are happening,” Salameh says with supreme confidence. “In Jordan, we will start with a 1,300m2 Aïzone but within two years we hope to have a 6,000m2 fully-fledged Aïshti store.”
And this is why, in 2005, despite the bombs and demonstrations, the Aïshti empire, according to Salameh, clocked up roughly $100 million in revenues. With his regional outlets in place, Salameh expects that figure to rise to $120 million by the end of 2006. In total, he has over 20,000m2 of retail space, a figure that he is confident will rise to 60,000m2 by 2011. By then he fully expects the company to be worth $500 million with a presence in every country in the Middle East and turnover from Lebanese outlets to be hitting $230 million, a figure that today would represent a shade under 10% of the entire local retail sector (including supermarkets) and approximately 1.2% of Lebanon’s current GDP.
Not surprisingly, everyone wants a piece of the action. “On a daily basis I get calls from private equity managers, IPO requests, people who want to be shareholders and franchisees.” Salameh sips his water. “It’s really something. We receive about five emails a day from interested parties as far apart as Dubai, Texas, and Berlin.” So what is the company worth today? “Well.” Salameh sighs and sits back. “We recently began an evaluation with Ernst & Young but it is still premature. We are still expanding and we will show our real potential in around 18 months. But today if I had to put a figure on it, I would say around $250 million but I think that within the coming years we should soon double that figure.”
Not bad for a law student who began life importing remaindered stock from Italy to sell to his friends. It is a story that Salameh is happy to tell. “I was at USJ in the late 80s. It was during the war but nonetheless I traveled a lot to bring back outfits for myself and friends. I liked to travel. I had a curiosity. Before I studied law, I went to the South of France to study dentistry. I went with some friends but didn’t really enjoy the studies. Fashion and architecture was always my thing.” He pauses. “And travel. I would go abroad at any opportunity even when there were no planes and you had to take a boat to Cyprus to catch a flight. And of course I brought back my goods.”

Building the brand
Salameh’s first outlet was a warehouse in Jal al Dib and the locale is still very much within the Aïshti compass. At first he easily shifted his stock but soon he realized that his customers were demanding newer lines. “They were more sophisticated than I thought,” he remembers. “They would bring me magazines showing the latest collections and tell me they wanted this suit and that jacket. It was not enough that I was bringing stock and this is what led to [the creation of] Aïshti. I had to satisfy demand.”
Salameh admits he was young and had to work hard to convince suppliers to deal with him. “At first no one took me seriously, but then when you show your first letter of credit, they work with you. But if I had to pinpoint two concerns they might have had at the time, they would be my age and the fact I came from Lebanon, a country at war, but by 1992 or 1993 [the suppliers] relaxed when they saw that I could build brands.”
And he has certainly demonstrated a flair for taking brands and unraveling them in front of a label hungry Lebanese public. Take Ermenegildo Zegna: at one point the company was selling a mere 40 suits a year in Lebanon; now Aïshti shifts over 2000. “I defy anyone else to carry the brands we have with the same professionalism, the events we stage, the volume and coordination, the demand and the image.”
And there are others. In the UK, Burberry might have passed the apex of its recent renaissance, but in Lebanon Salameh is ecstatic about its performance: “No one had heard of it. Now it is going phenomenally, as are Dolce & Gabbana, ChloÊ, Cavalli, Gucci and of course Zegna,” he enthuses, adding, “I get satisfaction out of every single brand. To me it is a prima donna. We are always convinced of potential and it is a pleasure to deal with [these brands].”
Because Salameh believes he offers his brands the best service. “We have the human resources and the experience. We have shown we can do a lot of things. They trust us. For example, Cartier really like what we are doing. We are known as the only company that can promote luxury in the Middle East. We do the best events and have the best people. Within five years we will be in every country in the Middle East.”

Hard work
He cites being punctual with payment and respecting relationships as key to his success. He also admits he learnt a lot from the Italians and their work ethic. “I always thought they lived the dolce vita, but, especially in Milan they work very hard and take themselves very seriously.” It has stood him in good stead. “Even during the war I always respected commitments and when Hariri was killed and we faced a national crisis, I still took my orders. I could have told them we have a force majeure in Beirut in 2005 but I didn’t.”
Although his parents are now very proud of his achievements (Salameh’s brothers and sisters are also shareholders in the company) it was not always thus. “At first they did not take me seriously, although we were not worried. I was young and they thought it was a fad. Today it’s a different game.” He chuckles “Also, I am married with three children. I must be serious.”
Salameh’s family is his main preoccupation outside his work, although he does admit to a fondness for skiing and even skydiving.
“But really I enjoy working,” he concedes. “My wife tells me it’s my favorite hobby. I am always focused on what I do. I work in beauty and glamour. It’s a great life. I guess I am lucky.”
We move back to the story of Aïshti’s ascendancy. By the early 90s, Salameh had opened in Mar Elias, racking up outlets in Verdun, Sofil, Jal al Dib and Avenue Charles Malek, before heading for the mother ship in the Downtown and by 1994 he had retained Saatchi and Saatchi as his ad agency. Not all the locations are still there, but his retail spoor is a testament to his belief that renting offers greater flexibility. “We don’t own a lot,” he explains. “Renting is tax deductible. The Lebanese are not used to declaring but you can amortize the decoration over five years. OK, our back-offices are owned as is Aïshti Seaside but if you want to expand quickly in Beirut, you can’t own.”
Salameh rented his Downtown shops in 1999 in a $1.5 million deal that secured him a chunk of prime downtown real estate between Rues Foch and Allenby at an average of $300/m2. “We have made the area,” he beams. “Today we are the major tenant. Now there is a spa and a restaurant and we have our mono-brand [shops] Gucci, Cartier, Zegna, Diesel and Celine.” Aïshti is also committed to the delayed Souks project. “[Solidere chairman] Dr [Nasser] Chamaa is building with excellent materials. It is a modern mall and we will be there with our international brands.”

Structured company
But Salameh is keen to stress that Aïshti is not run like a family business. “Unlike many [companies in Lebanon] that have no structure, we have a serious back office from IT to transaction control dept to the financials. Today, we are working in Lebanon to create a solid structure and get the best people helping us to take the company regional.”
Indeed, regional expansion seems to be the buzz word for Aïshti. But is it to avoid putting all Aïshti’s retail eggs in one local basket? “No not at all people,” counters Salameh. “People tell me, ‘Bravo! You are opening elsewhere, but to tell you the truth I am satisfied with Lebanon. In 2005, we absorbed the shock. It was business as usual we had our structure and we had our overheads. So for us it is not a matter of diversity. It is a matter of exporting know-how. We know our [foreign] customers more than the Europeans and maybe even better than the sales staff in their own country. Therefore we need to be regional.”
Which begs the question will Aïshti ever move beyond the comfort zone of the Middle East? “Well I told you about the enquiries from Berlin so that may be a possibility. If we had the money and the resources I would have opened in Italy. I know it very well. I speak Italian. I have an office. I have staff, so maybe if we have an IPO and the right business partners we would consider Italy.” I ask him if Eastern Europe, especially the conspicuous spending new Russians, might offer rich pickings. “I get a lot of requests but it’s not really an area I know that well.” Enough said.
Aïzone is a concept that is close to his heart and one that has huge regional roll out potential. I venture that Aïzone is to Aïshti what Emporio was to Armani but I am quickly shot down. “No, no, no. That was 15 years ago, the 80s. Now we have a lifestyle with more choices. Tops, jogging suits and jeans. Less pretentious.” We have over 100 brands. We can pick. We can mix and match.”

On the map
Well, how does a man with a finger on the fashion’s throbbing pulse see himself? “I like jeans but I am essentially a conservative guy. I like blues and grays for suits. Something from Zegna or bespoke.” And on women? How does he see like to see the modern Lebanese woman? He pauses, perhaps in search of answer that will not offend. “I like the classics. I like it when they mix and match.” Has he changed the way Lebanese dress? “Yes. In particular the men. They have become more classical, especially after the war. Lebanese men have become more fashionable, easier in themselves, more natural. I would like to think we have contributed a lot to this.”
But sartorial philosophic musings aside, Salameh and his Aïshti brand are also bona fide ambassadors for Lebanon and the Lebanese economy. Aïshti has become a byword for the new Lebanon. When Viscount Linley, nephew of Queen Elizabeth II, and his wife dropped into Beirut in November, their host, no doubt wanting to show off the best Lebanon had to offer, took the couple to the Aïshti flagship store on Moutran. Linley, no slouch in the clothing department himself and a furniture designer of international repute, would have approved. The message would have reached the dinner tables of Belgravia and Chelsea, ensuring another tile was added to the mosaic of a cool and trendy new Lebanon.
National pride
For his part Salameh believes in his country. As well as lending his name to worthy business initiatives like Bader, he is keen to stress the positive aspects of the Lebanese way of life, the superior shopping ambience, the inherent culture, the still competitive prices and what he believes are the best salespeople in the Middle East. “Our foreign customers enjoy our way of doing things.” But what about our shortcomings? “Yes, there still needs to be [more] regulation and infrastructure,” he says before his enthusiasm for the positive regains control. “You must understand that we have no real competition, not even Dubai, which has no hub. Here we have beautiful pedestrian streets. We are sophisticated. We have a different flavor.” By now he is in full stride. “Look, Lebanon is the land of opportunity. You can buy land in Beirut today and double your money in a year. You can’t do this anywhere else. But you have to work. People don’t see me and that is because you don’t make money attending dinners. I am busy building what I want to build the most important, privately-owned retail business in the world.”
Outside the Downtown, as well as the successful Aïzone at the ABC Ashrafieh, Salameh operates Aïshti Seaside and the soon to be revamped Black Box in Jal al Dib. Have the last two proved to be white elephants? He laughs. “It is good that no one can see what we see. It has clear advantages. We are still buying land. It is visible. It is on the water and people, who have held fashion shows there like ChloÊ, cannot get enough of it. It is an affluent catchment area, the entrance to Beirut. In the long run it will work. It will be a promenade, mixing art and fashion in a cool environment by the sea.”
Then there is that magazine. Surely an extravagance? Not a bit of it. “Our suppliers love it. They ask for more. They tell me that even if they stop dealing with us they want us to send it to them. It’s a great marketing tool, a nice business card. It is my baby. I cannot wait for it to come out and see the cover.” Salameh admits it was initially a huge investment but one which is repaying the debt of faith by now paying for itself. As well as being a vehicle for Aïshti brands, it is now attracting ads from other makes, keen to align themselves with Salameh’s white hot labels and his affluent readers. It is also good news for Lebanon, which could do with a bit of pizzazz to counter the standard image of bombs, beards and chaos. “It’s promotion for the country,” Salameh explains proudly. “We send 500 copies to our suppliers by DHL. The CEOs of all the fashion houses all want a copy to take home. We use international photographers and contributors from all over the world. It is our vision of how we see things. We couldn’t find the right vehicle for our brands so we did it ourselves.”
Rumors
Of course success and recognition come at a price. In Salameh’s case it has been the rumors that his empire is nothing more than a front for a money laundering operation. How else does one explain the extravagance and the rapid expansion? So what does Tony Salameh say to those people who say he is shady? Salameh rubs his eyes, no doubt tired of the insinuations. “Nothing shady can last. Everything is discovered in the end,” he says, perhaps referring to other profligate but short-lived retail adventures. “Many of our competitors have tried to get our brands but have failed and so the easiest thing to do is to create [stories] and be hilarious about how we are succeeding. I want competition. I have heard a lot of these stories but in the meantime I have been busy building a company.” There is a silence. “Listen. How could I have been audited by one of the big four [auditing firms], bank with HSBC from day one, with BNPI and the big Lebanese banks such as Fransabank, Banque de la MÊditerranÊe Audi-Saradar and be able to represent all these brands if there was the slightest hint of money laundering. I have gone to meetings where people have said, ‘oh are you sure Tony Salameh is coming? I heard he was in jail.’ I haven’t even had a parking ticket in my life. They can’t accept that I am clean especially in a country where there is money laundering, but the truth is,” he pauses. “Our shop windows are the truth?”
As Keat’s wrote, “Beauty is truth, truth beauty – that is all ye know on earth, and all ye need to know.” In Tony’s world at least.

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Business

Who’s Who at Lebanon’s Investcom

by Executive Staff
written by Executive Staff
Azmi Mikati holds a bachelor’s degree from Columbia

Taha Mikati, chairman

Taha Mikati is the founder of Investcom. He began building businesses in 1979 after founding a successful construction business called ACC in Abu Dhabi. His knowledge of the construction industry was based on his experience as a civil engineer. According to a spokesperson at his PR company in London, Taha Mikati decided to sell his share in ACC in 1992 “to focus his energies elsewhere.” Taha Mikati then “identified the opportunity to develop a high quality telephone service provider in developing, under-penetrated high growth mobile telecom markets. He founded Investcom for this purpose and remains today closely involved in the company’s strategy and operational performance.” His PR agency admitted that they had “no photograph of Mr. Mikati,” hence the image above.

Najib Mikati, vice chairman

Najib Mikati is the brother of Taha Mikati and a former Lebanese prime minister, an office he held in the interim period after the murder of former premier Rafik Hariri and the downfall of the government of Omar Karami. He has also held ministerial posts and is a former member of parliament. He was a member of the executive committee of the National US-Arab Chamber of Commerce in Washington DC, and a member of the board of directors and chairman of the economic committee at the chamber of commerce, industry and agriculture in Beirut and Mount Lebanon. He has close ties with Syria’s ruling Assad family Najib Mikati holds a master’s degree in business administration from the American University of Beirut, and according to Investcom’s PR company, “has also attended several executive programs which include the Owner/President Management Program at Harvard, Boston in 1990, the Avira Program at INSEAD, Fontainebleau France in 1994, and the Innovations in Governance Executive Program at Harvard, Boston in 2004.

Azmi Mikati, chief executive officer

Azmi Mikati is the son of Taha Mikati. He was appointed CEO of Investcom Holding in 1998. He is responsible for the global strategy of the company and its implementation. Prior to this role, he was the director of T-One Corporation (international carrier) and a board member of FTML, the France Telecom subsidiary and the previous operator of one of two mobile networks in Lebanon. Azmi Mikati was educated in the United States, where he earned a bachelor’s degree in science from Columbia University.
 

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Economics & Policy

Not so precious Metal

by Faysal Badran
written by Faysal Badran

There is almost unanimity on the precious metals among market participants. Almost every analyst, every brokerage house, and all speculative type players have their eyes glued to gold and silver. There has also been a drag effect from other markets, such as oil and copper, and since historically, they tend to move in tandem, the commodity boom has been eye-popping. The backdrop for the rise in metals has been near perfect in terms of rationale. The fans of precious metals base most of their argumentation on the global financial excesses, the looseness of central bank policies which weaken currencies and their gloomy outlook on the world in general, from a geopolitical perspective. More recently, the advent of China on to the scene as a large buyer of metals, especially copper, has added yet another compelling layer of positivism on to the view. Precious metals are seen by many as a unique store of value in a turbulent world, and given the performance of gold and silver in the last four years, it is a tempting argument.

Since 2001, silver is up nearly three fold, (300%) and gold about 250%, since the beginning of 2006, they have risen nearly 20%, dwarfing all other asset classes. So the purchasing power of silver and gold has gone up significantly faster than inflation and paper assets. So it is understandable that some are getting excited, especially that some of the fundamental arguments in favor of investment in precious metals are compelling. So is it time to take the plunge, or at least to consider precious metals in your overall asset allocation decision? The excess excitement, media hype and the technical backdrop, paint, for the contrarian investor, a different picture though, one of caution ahead.

Need to diversify

Although precious metals have attracted a lot of attention on their own merits, namely that they are perceived as a hedge against inflation and protected in case of outbreak of war and terror, perhaps the super spike in oil has played a part in their rise. Central banks, having spent most of the 1990s selling their inventory of gold are now scurrying to buy back as they look to diversify their assets away from the monolithic US Dollar. The reasons or pretexts behind the comeback of precious metals vary from one country to another, but on a global basis, most central banks have spent the last decade injecting liquidity into the system. So this rise in money supply across the globe, averaging nearly 8%, certainly helped, and with interest rates unusually low from a historic perspective, there was little to hinder the move up, and demand for physical gold in Asia added fuel to the nascent fire. There are even some sound and well formulated arguments that given the irresponsibility of central banks and the FIAT system of currencies, gold (and to a lesser extend silver) will end up replacing paper currencies completely.

They argue, somewhat correctly, that the fragility of the global financial system and the trend toward competitive currency devaluation, i.e. countries loosening their monetary reigns in order to compete in trade, will lead to a systemic breakdown and gold’s function as a store of value will take on a new dimension. It is true that central banks have been on a reckless money printing binge, and the money supply figures worldwide paint a picture of a mad rush to maintain liquidity high and avert a global recession. While we may agree that in the medium to long term, there are many imbalances in the global financial system, some large overvaluation in equity markets, and an excessive debt and real estate bubble, and that gold will be possible many times more expensive in a few years, it is unlikely to continue rising from current levels due to a multitude of reasons, the main ones being the overstretched technical condition.

The decline on the dollar, the rise in demand for commodities from China, and the concern over geopolitical risks (Iraq, Iran, and risk of terrorism) may have all constituted facilitating factors for precious metals revival and most portfolio managers and fund players are now looking at precious metals as an integral portion of their assets. The managers that had included metals in their portfolios have seen a positive impact from the rise on their overall returns, and the presence of gold (and oil) is a must in any portfolio, but the timing of such inclusion is crucial. While these asset classes serve to cushion the portfolio in times of crises, as gold and silver tend to be negatively correlated with traditional asset classes, they are not always safe to own. Currently, the technical analysis of metals, and to a lesser extent oil, points to lower prices ahead.

Bubble?

Analyzing the technical position of any commodity is a two step approach: first we look at the chart patterns, and next we look at the level of commitment of traders report. As can be seen in the charts here, the charts are painting a picture of excess. The pattern of the rise is almost vertical in its latest rise and this, coupled with a high degree of excitement on the part of the media and the public is a warning sign. This kind of action reveals a bubble-type environment, where the attitude seems to be, “get in before it’s too late”, a notion often associated with major tops, not healthy trends. This may seem like anecdotal evidence, but this type of enthusiasm for any market belies a simple fact: everyone involved is expecting a similar outcome: a rise in prices.

Another key factor in looking at commodities is the distribution of contracts in the futures market, is the Commitment of Traders Report, which shows which type of trader is holding and selling. There are two broad categories of traders: the commercials, i.e. traders involved in the commodity on a production level, and the speculators, which are mainly punters of the stuff. For a market to rise in healthy and balanced manner, demand must stem mainly from the commercials that use the futures market to hedge their production, and the speculators must on aggregate be selling. This is where you have a healthy balance between “genuine” and speculative demand.

At the time of writing, both silver and gold are in a position where speculators are aggressively buying and the commercials are selling, this is very frequently the nail in the coffin of the bull market. Silver will hit major resistance near $15 and gold will find it difficult to move much above the $650 area. In all likelihood, investors looking to add these assets to their portfolios must wait for lower prices and a more balanced set-up of players in the futures market. Due to the advent of Exchange Traded Funds, small investors no longer need to buy futures or physical commodities to participate, they can use the Barclays GLD and soon SLV actively traded on Amex to buy and sell. Again, this timeframe will probably mark the highest point in the precious metals and technically the charts point to at least a 25% drop before they are safe to own again.
 

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Business

Policy crossroads

by Michael Young
written by Michael Young

American intellectuals and foreign policy wonks have been engaged in a spirited exchange of late, not for the first time prompted by one of their own: the intellectual and former foreign policy wonk Francis Fukuyama. In the dying days of the Cold War, Fukuyama wrote an illustrious essay in the neoconservative journal The National Interest, which he later turned into a book. He made the case that the defeat of communism signaled an ideological “end of history.” As he described it, this “end point of mankind’s ideological evolution” saw “the universalization of Western liberal democracy as the final form of human government.”

Debate

Now Fukuyama is back, having published America at the Crossroads: Democracy, Power, and the Neoconservative Legacy, an essay in which he no less illustriously, judging from the reaction, took to task American neoconservatives and the Bush administration for leading the country into a calamity in Iraq. Initially among friends when it came to the neocons, he used his essay to loudly broadcast his divorce. Like any messy separation, the results are bracing: Fukuyama’s newfound skepticism has provoked a no-less spirited response from critics, not all of them neocons.

Fukuyama proceeded dialectically: the neocon approach, embodied in the so-called Bush doctrine, outlined a policy of preemptive war to block looming threats to the United States from rogue states and terrorists; but it also held that the way to dry the terrorist “swamp” in the Middle East was to advance democracy there. For all intents and purposes, he wrote, this failed in Iraq. But Fukuyama also argued that a US withdrawal from global responsibility due to the Iraqi fiasco would be a “tragedy”, since “American power and influence have been critical to the maintenance of an open and increasingly democratic order around the world.”

What did Fukuyama propose as a synthesis of these two impulses – modesty imposed by the difficulties in Iraq, but also recognition of the beneficial uses of American power? Something he calls “realistic Wilsonianism”, by which he means the US must continue to support democracy and good governance around the world, but avoid imposing it. “Democracy promotion,” he writes, “must be a long-term and opportunistic process that has to await the gradual ripening of political and economic conditions to be effective.” And where should the US put its money? In government- or congressional-funded organizations such as the US Agency for International Development, the National Endowment for Democracy, and the like, which have experience in the matter.

Fukuyama’s critique is worth considering, and his proposals include at least one good idea, namely that the US create flexible new institutions with international partners to confer legitimacy on collective action. However, his conclusion wilts hopelessly when recommending operating through USAID, NED, or the many nongovernmental organizations devoted to democratic issues. All of these institutions have mostly failed to enhance broad Middle Eastern democracy, and we have decades of disappointment with which to judge them.

Power politics

The shape of the future Middle East will, unfortunately, not be determined by intellectual debates in the US. Given the situation in Iraq, the looming crisis over Iran’s nuclear program, a new Palestinian government that endorses suicide attacks as legitimate resistance, and more, there is little room for a sober, academic, discussion of free Arab minds and markets. But Fukuyama’s musings, because they are effectively directed at the administration from a critical sympathizer, in other words from within the same camp, are revealing in that they expose deep divisions in the American political-intellectual elite over how to spread democracy and capitalist culture in a region which has taken on vital interest.

The US stands at a crossroads. In a recent interview, the prominent Iraqi intellectual Kanan Makiya argued that he didn’t anticipate a return to deep-seated US support for Arab autocrats. In this sense, he echoed Fukuyama’s “realistic Wilsonianism.” But if stalemate persists in the Middle East, or if a broader conflict breaks out in the coming year, could the present and future administrations resist relying on those despots whom they are used to dealing with? Would they resist the familiar pull of traditional “realism”, with its respect for national sovereignty, and look the other way on random abuses of human rights?

Fukuyama is right in arguing that the US needs a new approach that highlights advancing freedom. But his preferred solution for the Middle East is fanciful, and would be as sterile as previous attempts to effect change. Without factoring in the use of force, somewhere, in advancing democracy, realistic Wilsonianism may end up being unrealistic claptrap.

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Economics & Policy

Hedge Your bets

by Nicolas Photiades
written by Nicolas Photiades

Founded by Marc Hochar, a former Lebanese investment banker who had spent his entire professional life (more than 13 years) in investment banking and global markets with US investment bank JP Morgan, Melkart Capital has become the talk of Lebanese financial circles and the region. Melkart is the first large-scale international “fund of funds” to be managed out of Beirut by Lebanese specialists. In less than 20 months, the fund has attracted around $70 million of investments from high-net-

worth individuals from Europe, Latin America and, to a lesser extent, the Gulf area, as well as institutional investors, in the form of large corporations, from Europe and Latin America.

Three companies

Melkart Capital is actually made up of three companies: Melkart Capital Management, a firm incorporated in the Cayman Islands, which is an asset management company specialized in global alternative investments, including hedge funds; Melkart Capital SAL, which is a Lebanon incorporated and based company, responsible for the brokerage and distribution of investment funds in Lebanon, and the Melkart Diversified Fund, which is the actual global multi-strategy fund of hedge funds. The Melkart Diversified Fund is managed by both Melkart Capital Management and by Antarctica Asset Management, an investment management firm established in the British Virgin Islands. Antarctica is an investment advisor to Melkart Capital Management, which was founded in 2001 by former investment bankers. It specializes in hedge fund management and investment advisory with around $700 million of assets under management and a research unit based in New York. Finally, it is worth noting that Melkart Capital SAL is registered as a financial intermediary in Lebanon with a capital of LBP1 billion, and is regulated by the Central Bank of Lebanon (BDL).

The “seed” money of Melkart and its flagship fund, the Melkart Diversified Fund, was initially brought in by Marc Hochar personally as well as by a small group of international investors, who were partly brought in by Antartica. With its 5-year track record and the extensive investor relationships of its managers, Antartica has been instrumental in providing the Melkart fund with investors. Antartica still plays a vital role in the management of the Melkart fund, as it provides the necessary quality research and market and industry reports, as well as all logistical support the Melkart fund might need. Fund raising was actually carried out from the start by both Melkart and Antartica who initially joined hands to raise around $70 million in 18 months. The Melkart founders/managers raised at least 50% of the total $70 million.

Solid structure

For the moment, 60% of the Melkart fund’s total is accounted for by European investors, while Latin American investors make up around 25%. Middle East investors make up for the remaining 15%. Most of the present investors are high net worth individuals, who normally invest into the Melkart fund through international asset managers and private banks. The latter offer the Melkart fund to their customers as one of the funds they officially represent. Currently, the fund does not include many Gulf investors. The aim is to start approaching these investors when a solid enough track record would have been built, as Gulf investors are usually reluctant to invest into funds or other investment products if there is not a few years’ track record. Only Antartica has a five-year track record which shows a more than decent return, while Melkart shows an eighteen months track record. For instance, the return of the Melkart Diversified Fund (MDF) for 2005, given net of fees was close to 15%, and has already reached 5.21% for the first two months of 2006. If all goes well, the MDF should yield perhaps more than 25% for 2006.

Melkart Capital’s structure is a solid one, in the sense that its management and distribution are carried out in Beirut, while the custodian and administrator for the Fund, HSBC, is based in the Isle of Man. The latter is highly regarded by fund managers, as it is the strictest of off-shore centers in terms of regulation for anti-money laundering. Given the Beirut base of Melkart Capital SAL, the broker/distributor, an Isle of Man custodian and administrator is of prime importance. The actual funds coming from investors are placed with the Melkart Diversified Fund (MDF), which is based in the Cayman Islands. The MDF places its funds into more than 30 hedge funds throughout the world with different investment strategies. The MDF is principally invested into equity (21.7%), while the rest is spread between global macro hedge funds, event driven funds, emerging markets, distressed and credit funds, fixed income, convertible and statistical arbitrage, managed futures and commodities. The auditors of the MDF are Deloitte and Touche, while Société Générale is the leverage provider (provider of cash through a credit facility) with a pledge on the Fund’s assets. The legal counsel for the MDF, Walkers, is also based in the Cayman Islands and is of international repute.

Experience

Not only is Melkart Capital’s structure solid, with big names in support and an internationally approved legal structure, but the investment management skills and strategy are also performing. The managers (Melkart and Antartica) have a strong understanding of the hedge fund industry, have expertise in risk management and last but not least, have access to top quality managers. The investment managers (Melkart’s managers, including Hochar, and Antartica’s managers) have a combined experience of 50 years in the fields of quantitative analysis and derivatives trading, which are widely used by arbitrage hedge funds to manage risks. It is also worth mentioning that both Melkart and Antartica have extensive relationships with a large number of global fund managers, who used to be their trading counterparties, and often, their working peers.

The investment strategy of Melkart is principally to choose the right funds to invest into, as well as the right mix in terms of diversification. The Melkart investment managers pay particular attention to the volatility of the funds they are contemplating in both absolute terms and relative to their peers. The consistency of returns is thoroughly scrutinized as well as the funds’ management quality and strategy.

New niche

A background check on managers of funds is also carried out extensively. This task is seriously facilitated with the help of Antartica, which not only has the experience and track record in the field, but also sufficient resources to carry out thorough checks of funds’ managers, their strategy and reputation. Melkart’s managers nevertheless pay a visit to the funds they invest in once every two to three months. They also remain prudent in their strategy, in the sense that they make it a policy to maintain three layers of hedge inside their investment strategy.

Overall, Melkart provides its own investors significant added value, in that it provides its investors access to top tier hedge funds, which are normally closed to individuals or new investors. Through its extensive relationships in the fund management world, Melkart can identify and provide privileged access to talented new managers. The MDF itself was short listed for “Best Newcomer Fund of Funds” in the HFR 2005 European Fund of Funds Awards, while the various Antartica funds were nominated during the same year as “Best Arbitrage Fund” and “Best Fund of Funds”. MDF not only provides access to closed funds, but also its relatively small size allows for quick asset allocations switches and investments, for a customized approach for every investor, for full transparency (monthly update, statistical data, etc.), for a full diversification benefit with a minimal investment size, and for improved liquidity.

By building such a sophisticated tool and making it accessible to investors, Marc Hochar and his partners have capitalized on an extensive experience accumulated during years of work spent among the elite of world finance. Melkart can hence be safely described as a solidly constructed pioneer, which should pave the way for the establishment of a new highly specialized niche in Lebanon.

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Real Estate

Together for change and reform

by Safa Jafari
written by Safa Jafari

Under the banner, Making Reforms Work in MENA” dialogue within plenary sessions and workshops of the MDF5 hosted in Lebanon last month proves that reform in our region has become a matter of urgency in the purest sense and while the Arab world has now recognized that there is a need for institutional, social, and economic reform it remains unable to push through the implementation phase of the process.

What is reform?

Simply defined, reform is change in policy which should benefit society as a whole. Policy can be economic, political, social, judicial, administrative, electoral, and so on. It can mean reform of a whole institution, a system, a set of laws, or the way a certain bureau functions. Reform can mean change, improvement or full elimination in preference of new steps towards more efficient access and delivery of goods and services to everyone in society. It will not come in one magical stroke but has become a necessity for all Arab countries. These countries realize the need to catch up with the rest of the globalized world. Depending on their views of the causes of delay in arriving at efficient productivity and development for all, participants in the MDF5 differed in their approaches to the implementation of reform. Those who examined current institutions and active policies came up with suggestions for ways forward tackling specific projects, while others continued to blame “the west”, “colonialism” or even the “Ottoman rule” for their current woes.

The Middle East and North Africa Development Forum (MDF)

Organized by the World Bank Group, the United Nations Development Program (UNDP) and Middle East and North African think-tanks, the MDF draws policymakers, civil society actors, thinkers and representatives of international organizations and the private sector to engage in open policy dialogue to promote social, economic and political development in the region.

According to the World Bank, the MDF collaboration is dedicated to: (i) empowering civil society to participate in shaping public policy; (ii) contributing to national and regional policy debates in key areas; (iii) improving the extent and quality of research on economic and social policy issues; and (iv) creating vibrant networks of development actors in the region. In Lebanon’s case, a fifth key use of the MDF can be added: gathering international support and networking with international development organizations for upcoming reform initiatives.

Since its inception, the MDF has convened four times: Marrakech 1997, Marrakech 1998, Cairo 2000, and Amman 2002. At Beirut 2006 the MDF host partner, the Lebanese Center for Policy Studies, brought together 750 experts from civil society, government institutions, the private sector and the international community to discuss “how to make reforms work in the region”. Participants gathered from the Middle East, North Africa, Iran, Turkey, Europe and USA to discuss pillars to achieve reform in the region, mainly: political will for reform, empowerment of the private sector, equality, transparency, judicial reform, capacity building, and democratization.

The three days consisted of workshops and plenary sessions revolving around 14 themes which developed as a result of collaboration since Amman 2002. They included judicial reform, sustainable development and poverty alleviation, rethinking the role of the state, trade reforms in MENA, institutionalizing and accelerating economic reforms, corporate social responsibility in businesses, enhancing the MENA business environment, gender in institutional reforms, social and public sector reform, the role of youth in promoting good governance, reforms aimed at better city performance, capacity and knowledge building for the rule of law, next generation initiatives and the role of parliamentarians in championing reform. There were also side activities (or action-oriented meetings) discussing derivative issues.

MENA: Needing reform but stuck in implementation

There are several perspectives that support the need for reform in the MENA region. This region has achieved much progress in raising the status of living and the level of income per capita has risen almost seven times since the mid 1960’s (when real income per capita was $1.6 per day) according to Mustapha Nabli, Chief Economist and Sector Director at the MENA Vice-Presidency of the World Bank.

Poverty dropped in the mid 1980’s to 25% and social development indicators showed much progress in education, life expectancy, child mortality rates and so on. However, since the 1980’s progress has been stalled. Although some human development indicators continue to improve (such as mortality rates and illiteracy), poverty reduction has stopped (still at 20-25% of population on less than $2 per day, and with a larger population today, this indicates a large increase in the number of the poor); GDP per capita remains flat and there have been no gains in the standards of living on average. There has been an increase in certain incomes, yet the poverty ratio remains unreduced in the Arab societies; meaning worse conditions with a growing population

In addition to a chronological comparison, a geographical one shows that the MENA region is lagging compared to progress in the rest of the world in its pure economic indicators, business climate, governance and gender employment. Much of what is considered “good” performance is actually not good enough when considering the rate at which this score came about, or when comparing to other ‘middle income’ regions. Despite improved performance, per capita GDP growth in the region remains below 4% a year, well below the average of 4.5%-5% for all developing countries. For the non-oil countries the rate is much lower at 2%-2.5%.

A third way to look at the need for reform in the MENA region is through looking at the future and the challenges its poses to the region: Water and the environment is the biggest challenge for the area causing much conflict and instability. In addition, the demographic change and dynamic has delayed the expected impact of growth. The growth of the labor force is expected to reach the unprecedented rate of 3.5-4% per year for the next 20 years (without counting the female workforce). As societies are becoming more educated and women are increasingly entering the market, unemployment poses another huge challenge for the region. According to the World Bank’s Vice-President of the MENA region, the region must create some 90 million jobs over the next 20 years – at twice the pace of the past 40 years – to absorb those seeking jobs today and new entrants. This also means much reform is needed before the region is swamped by a growing population under the poverty line; towards increasing the rate of growth, strengthening the role of the private sector, providing better, higher paid jobs for both men and women. A simple, logical equation was proposed in the MDF whereby when the costs of non-reform (or the status quo) are higher than its benefits, it is time to reform!

Lebanon: Good timing and determination

Lebanon stood out in the forum as an example of a nation that, as Prime Minister Fuad Seniora described, in his opening address, “is more determined today than ever to engage in democracy, rebuilding the state, empowering governance and achieving real and wholesome reform.” Despite difficult political and economic circumstances, there is a general agreement that an institutional malfunction exists, and that it is time to implement good governance, transparency, social security, and a recovering economy with job opportunities. In his speech, the prime minister encouraged civil society and the intellectuals to push for reform from within, despite some interest groups’ opposing efforts; emphasizing that we must learn from each other and be aware of where we stand within the region: how we affect others and how others affect us.

The MDF5 offered a timely window of opportunity for Lebanon the host. According to Chantal Dejou, World Bank representative for MDF, Lebanon was chosen because there was a sense of momentum and historical change in the country during the past year. Choosing Lebanon as a venue for this prestigious event not only offered proof of international support for Lebanon and its efforts to recover, it highlighted the case of Lebanon today and brought it to the attention of primary donor bodies which were present at the MDF5.

This is particularly important given that the country is preparing for the Beirut I donor conference; grouping Lebanon, the European Union, the United States, United Nations, International Monetary Fund and Arab countries and set to take place by the end of this year with the goal to attract financial assistance to help the government reduce its $38 billion debt. Another reason the MDF5 was timely and very relevant is Lebanon’s current efforts for reform, pegged on the paper proposed by Minister Jihad Azour, being discussed at the cabinet and introduced to President Bush during Prime Minister Seniora’s recent visit to Washington, proposes the following ‘pillars’ of the reform program: growth-enhancing reform measures; privatization program; prudent monetary policy and financial sector reform; social sector reform; and fiscal adjustment and structural fiscal reforms. The MDF5 highlighted the importance of themes very relevant to these pillars: economic growth, privatization, role of the state, corporate social responsibility, and trade reform. It also offered networks and facilitated actual projects awaiting sponsorship and partnership, through its selection of participants and international bodies.

As with the larger region, before funding is requested and approved, a broad-based consensus must be reached on the reform needed in the country. Sectarianism, political corruption, and the weakness of the public sector are accused as main causes of the failure of the economic sector in Lebanon. As former Economy Minister Dimianous Qattar told the Beirut Daily Star, “in order to carry out true reforms [in Lebanon], three steps should be taken. Forbidding MPs from becoming ministers as well, because MPs are the ones who punish ministers, and one cannot punish oneself. The second is supporting the Central Inspection apparatus, and the third is protecting solutions arising from Beirut 1.”

An urgent agreement must be made on the need to separate social and economic files from politics. The probability of success in achieving positive change in Lebanon is a function of how vested interests will fight to maintain their privileges, the government’s credibility in addressing real national challenges, the public sector’s ability to provide basic needs and services regularly to its people, the efficacy of the parliamentary system, the capability of the judiciary body, and the role played by parties within and without the Lebanese borders, still wielding particular influence in the country. Finally, the people’s trust in a reformed Lebanon must be gained. Otherwise, they will neither stay in the country to enjoy the fruits of reform, nor invest in the economies currently struggling to recover. But Lebanon today has a drive that may make it the first of the MENA countries to demonstrate that, war-torn or not, reform is possible and accountable governance is the way toward a dignified, prosperous life.

The MDF brought together scholars, lobbying activists, policy makers, and international donors in a unique opportunity that facilitates arriving at what best suits the MENA region for its progress and development. Participants were allowed to exchange notes on what works and does not work in their own experiences in their countries and they took off after establishing inter-regional and international networks for collaboration of development efforts within the region. Invited participants met on the final working day to discuss the future of MDF and sustaining its funding. The goal is that such efforts as the MDF touch the daily realities of the people outside the forum, and so we stand in hope that sustaining the forum does not distract the high profile players from the future of our region and sustaining its development.

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Finance

An idiot’s guide to hedge funds

by Nicolas Photiades
written by Nicolas Photiades

As a follow up to recent articles published in this magazine on fund managers, such as Philippe Jabre and Marc Hochar, and the numerous mentions in these articles of hedge funds, we thought we should shed some light on the meaning or definition of hedge funds, their origins as well as their characteristics.

In the financial community, the term “hedging” usually refers to entering transactions that protect against adverse price movements. A “hedge fund” could thus reduce risks through a strategy that acts as an insurance policy, and brings the level of investment risk to a minimum. However, the term “hedging” or “hedge” is very misleading as most hedge funds nowadays use strategies which are not at all “hedged” or without risk. In fact, most hedge funds only “hedge” part of their exposure to a specific market or product (whether its equities, bonds, interest rate products, etc.) and follow specific sophisticated strategies. With time, the investment community started to call these type of funds as “hedge funds”, even when the overwhelming majority were mainly exploiting market inefficiencies through the use of various sophisticated arbitrage techniques.

Their origins date back to 1949, when Alfred W. Jones set up the first hedge fund. His objective was to eliminate part of the market risk involved in holding long stock positions by short selling other stocks. He was also the first to simultaneously use short sales (the act of selling securities you don’t own, by borrowing shares from someone, selling them, repurchasing them at a later date, and then returning them to the original lender), leverage and incentive fees. In 1952, Jones converted his general partnership fund into a limited partnership, investing with several independent portfolio managers and created the first multi-manager hedge fund. By 1966, Jones’ “hedge fund” had outperformed all the mutual funds of it’s time.

A “rush” into hedge funds followed and their number increased from a handful to over a hundred within a few years (remember, this was still the late 1960s). However, there were high losses and bankruptcies during the difficult stock market times of 1969-70 and 1973-74, a period that saw a number of hedge fund managers, with the exception of such stellar luminaries as George Soros and Michael Steinhardt, wiped off the financial map.

80s boom

A new boom in the late 1980s, helped the creation of a great number of new hedge funds and by the mid-1990s, hedge funds were accused of manipulating the market and creating high volatility, although an official inquiry and study by the IMF showed no evidence of such wrongdoings. The collapse of the Asian and Russian markets in the late 1990s ensured the much publicized collapse of LTCM, although the hedge fund industry recovered relatively quickly and is today continuing to boom.

Today, the established definition of hedge funds is “all forms of investment funds, companies and private partnerships that use derivatives for directional investing; and/or are allowed to go short; and/or use significant leverage through borrowing.” Borrowing includes margin borrowing against securities, foreign exchange, credit lines and loans. By significant leverage, we mean borrowing in excess of 25%. Hedge funds have three main features: they charge clients a percentage of the profits; they aim to achieve substantial returns; and they can only take a limited number of investors.

On the map

Hedge funds are characterized by their free choice of asset classes, markets, trading style, and instruments. Most are sold on a private basis and many are incorporated offshore, while for regulatory and administrative reasons, high minimum investment levels are often required. Other characteristics include the infrequent subscription and redemption possibilities, and the fact that managers invest their own capital in their funds. Finally, hedge funds show low correlation to traditional markets and are marketed as being oriented towards absolute performance (performance above zero) instead of performance relative to a certain benchmark or reference index.

With our own Philippe Jabre, it could be said that Lebanon is somewhere on the map of the hedge funds’ world. However, when one realizes that the West had been offering this kind of alternative investment source for more than 50 years, and we in Lebanon are still cogitating about petty political issues with a complete disregard for economic development, then it is understandable why we still have an accelerating brain and youth drain. Pity.
 

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The Buzz

Living the high life

by Alex Warren
written by Alex Warren

The journey and not the arrival matters”, said the English poet T.S. Eliot, who would have turned in his grave at the sight of most modern travel.

Gone are his early twentieth-century rail odysseys aboard the Orient Express, complete with gourmet cuisine, bow-tied porters and more excess baggage than a triple divorcee with seven kids and a criminal record. We don’t even have Concorde any more, because ultra-luxurious supersonic jets couldn’t find enough rich punters to make them profitable.

Instead, things have gone to pot. These days we book our flights online, get herded onto a plane like lemmings and then crammed into seats with legroom designed for a stunted child-dwarf. And after all that, some airlines even have the cheek to charge us for everything from a glass of water to an extra kilo of luggage.

Airborne lounge

A gloomy state of affairs, then, but sometimes it’s worth reminding ourselves that the journey matters just as much as the arriving – and that executive travel is still alive, kicking and has free champagne.

At least, it did on the Business Class flight I took to Paris a few weeks ago. Predictably, I’d shown little hesitation in taking up the chance to test-fly Air France’s new espace affaires seats, and duly found myself bound for France on a grey Friday afternoon with high expectations for some travel in style.

I’ve flown Business Class once or twice before, but I have to admit that I’ve been a victim of the no-frills syndrome. I confess to a dark period of addiction to bargain Easyjet and Ryanair flights in Europe, taking my cheap thrills from booking absurdly far in advance to pay the lowest fare.

This was, therefore, a refreshing change. After speedily checking in at the special lane for Business and First Class passengers, I headed upstairs to wait in the plush surroundings of the stylish Cedar Lounge at Beirut’s airport.

A pre-aperitif drink and patisserie (I was going to France, after all), saw me through to boarding a new Airbus 777-300, which is a very big and clever plane. In fact it’s surprisingly big for the four-hour trip between Beirut and Paris; usually, you only get this kind of space on longer haul flights. Happily, it means that sitting in the deluxe section at the front of the plane feels more like relaxing in an airborne lounge than sweating in a sardine tin.

Culinary delights

Meanwhile, as my coat was whisked away and hung up in a private wardrobe, I stretched out languorously in seat 7B. Economy passengers passed by on the way towards the back of the plane, looking on enviously at my airborne throne as they shuffled past morosely.

Just under an hour after take-off, whilst reflecting that there is something undeniably pleasurable about sipping a glass of champagne at 40,000 feet whilst having your lower back massaged by a seat, the food started to arrive.

Along with the comfort of the chairs and the legroom, this is probably where Business Class really stands out the most. On my no-frills travels I’d normally order an overpriced beer or a rubbery sandwich just to help me ignore the gang of inebriated holidaymakers or wailing infants, but here the service and food were almost worthy of a top-class restaurant.

Smoked salmon, Swiss beef and magret de canard were the order of the day, all served beautifully on porcelain plates. The impressive personal touch was topped off by tablecloths, individual salt-and-pepper pots and mini bottles of salad dressing, whilst the wine list was chosen by Oliver Poussier, a leading Gallic sommelier who has selected three excellent vintages, including a premier cru Burgundy, to accompany the in-flight meal.

Easy chair

Nodding off after that was easy, and not just because of the Cognac XO I’d supped as a digestif. The supremely comfortable seats go all the way back to 180 degrees, making you feel as if you’re in your favorite easy chair, whilst the shell-like design keeps you separate from nearby passengers. By the time the wheels touched down at Charles de Gaulle I’d even figured out how to operate all the controls on my armrest.

For some irritating reason, though, I can never manage to doze for long on flights, and here was no different – despite the ear-plugs and eye mask which came in the little toiletries bag next to my seat.

Instead, I popped the electronic handset out of its housing, adjusted the excellent Sennheiser headphones and sat back to enjoy a blockbuster on the large back-of-seat screens. There’s the usual selection of games, music, TV shows films on offer, although frankly the latest Harry Potter was really rather sub-standard.

Four hours after leaving sunny Beirut, the Airbus landed in a grey, drizzly and strike-ridden Paris. If this was the arriving, then I’ll take the journey any day.

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Real Estate

Still not enough

by Safa Jafari
written by Safa Jafari

Last month marked Women’s Day on 8 March. It was time to revise what Lebanon had achieved in its promotion of women’s rights and what it yet had to work on; particularly since it ratified the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW) in 1996.

But even before ratifying the convention in 1996, Lebanon had achieved several important milestones towards gender equality, including:

n The granting of political rights to women (1953)

n The granting of equal inheritance rights unless opposed by a particular religion (1959)

n The right of married women to choose their citizenship (1960)

n The right to elect and be elected to local councils (1963)

n The abolition of the requirement of a husband’s permission for travel (1974)

n The abolition of the prohibition on the use of contraceptives (1983)

n The establishment of equal retirement ages and social security benefits for men and women (1987)

n The recognition of women’s signatures in real-estate procedures (1993)

n The ability of married women to pursue trade without husbands’ approval as well as women diplomats, married to foreigners, to pursue their diplomatic careers (1994)

n The recognition of married women’s rights in life-insurance policy procedures (1995)

It is noteworthy that in addition to granting political rights to women in 1953 and being party to conventions adopted by UNESCO in 1964 to enhance the recognition of women’s rights in education, Lebanon has, since 1972, ratified the two international covenant: on civil and political rights and on economic, social and cultural rights. Lebanon was also party to several other agreements such as those signed with the ILO on equal salary and equal employment opportunities for both sexes. In 2002, Lebanon also acceded to an agreement within the framework of the League of Arab States on the establishment of the Arab Women’s Organization, of which it is an active member.

Eliminating all Discrimination

By mid 1979, the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW) was adopted in 1979 by the UN General Assembly as an international bill of rights. Consisting of a preamble and 30 articles, CEDAW came to define what constitutes discrimination against women and to set up an agenda for national action to end such discrimination. Countries that have ratified or acceded to the convention are legally bound to put its provisions into practice and are committed to submit national reports, at least every four years, on measures they have taken to comply with their treaty obligations.

In 1996, Lebanon ratified the convention and made a commitment to include in its policies all mechanisms that promote women’s rights. And so, the state and national organizations went on to double their efforts in raising awareness on women’s rights and promoting ways that these rights can be respected. Examples of discrimination and violence against women were made public and action began to combat such violations through various penal measures. In fact, Lebanon ranked highest in its region with its 1995 score in the “Gender Empowerment Measure,” developed in the Arab Human Development Report 2002.

In addition, the number of female members of parliament has doubled in the last five years from 3 in 2000 to 6 in 2005 and the rate of female participation in elections processes has also noticeably increased. Another relatively recent arrangement is that signatures of both mother and father are now required when under-age children travel – not solely a father’s signature. These are examples of efforts to include women in the family decision making process.

It can also be safely said that within the country’s efforts to abolish illiteracy and provide affordable health services, women are indeed being targeted. Lebanon is witnessing an increase in the enrollment rates at all levels of education: primary, secondary and post-secondary – with an almost equal enrollment rate for women and men, and a shift is being noticed of women’s labor into new and less traditional sectors. The proportion of women working in the major professions – lawyers, engineers, physicians, pharmacists, judges, bank managers, media figures, university teachers, and researchers in the areas of literature, art and science – has increased considerably.

Shortcomings

Unfortunately, reality still shows that the process of amending the Lebanese legislation to bring it into line with the principles of CEDAW is still far from complete. Lebanon’s legislation does not contain provisions guaranteeing equality on the basis of sex as required by the convention.

Upon reviewing the national report, CEDAW expressed concern at the mention of honor crimes receiving mitigated punishment (especially the fact that criminal law states that a rapist is exempt from punishment if he “agrees” to marry his victim) and that women are faced with traditional obstacles when attempting to report incidents of violence.

Elsewhere women still only occupy 6.1% of public offices and engage in only 14.7- 20% of economic activity. The labor law still allows discontinuation of service to pregnant employees, while single mothers (12.5% of families) remain within the low income bracket. The national HIV/AIDS programs does not target women, there are regular reports of several cases of domestic abuse and sexual harassment in the workplace. Finally, to date 4.9% of women nationwide are married between the ages of 15-19 (the percentage is more than double in areas such as Bint Jbeil and Akkar).

Most importantly, much of this discrimination is official! To this day the Lebanese government is adamant about reservations it had since ratifying CEDAW in 1996. In particular the equal rights of women to pass on nationality to their children, equal marriage rights, equal rights in matters relating to their children, equal rights and responsibilities in matters relating to guardianship, wardship, trusteeship and adoption, the right to choose a family name and finally the right to fair arbitration in disputes.

The first item, concerning the right to pass on one’s citizenship to one’s children, has caused uproar and was a dominant theme during the celebration of Women’s Day last month. Before 1946, a Lebanese woman who married a foreigner would lose her Lebanese nationality, and, just three years ago, working women were unable to receive fringe benefits like health care. But until today, the children of Lebanese women married to non-Lebanese men still cannot claim Lebanese citizenship or rights.

Nationality law

This issue was raised during the assessment of the National Lebanese Report to the UN Committee on the Elimination of Discrimination against women, and, according to the Lebanese representative presenting the report, this anomaly is due to the fact that each Lebanese is subject to the personal status laws (and courts) of the 18 recognized religious communities that regulate matters such as marriage, parenthood and inheritance. According to MP Ghinwa Jalloul, politicians are afraid that allowing women to pass their nationality on to their husbands and children would disturb the delicate balance of the confessional system and open the door to Palestinian assimilation. In any case, work is being done to push this case forward and make the state abide by the CEDAW.

One such commission is the National Commission for Lebanese Women which, as a monitoring and advisory body, presented the UN committee with Lebanon’s National Report and briefed EXECUTIVE on where Lebanon stands in obliging and failing to oblige.

During the past month, the commission organized two workshops in Lebanon in collaboration with ESCWA, the first was held for the media to explore ways in which awareness of CEDAW could be raised in the public and the steps that the media should take to allow for better absorption of the policies of different governmental and non-governmental organizations in the country. A recommendation was made to highlight the convention and distribute the key points of its manifesto on Women’s Day. And indeed, there was wide media coverage of the CEDAW on March 8.

The second workshop lasted three days and saw representatives from several ministries and government directorates discuss “the role of ministries and government offices in the preparation of the CEDAW report,” exploring the need for better monitoring and reporting mechanisms and raised awareness amongst officials from the council of ministers as well as the general state security and internal security services, on how different policies can affect women’s rights. Each participating department proposed concrete steps to better monitor such policies and report them, in collaboration with the National Commission, to the UN.

Moving forward

Director of the National Commission for Lebanese Women, Mrs. Joumana Moufarige, told EXECUTIVE that, although Lebanon currently falls short in abiding by its CEDAW commitment, it is witnessing progress. Women as ministers and members of parliament, although not proof that they are equal decision makers in official administrations and different sectors in Lebanon, is still a sign that the application of the Beijing work plan that calls for 30% female representation in parliamentary councils by the year 2005 is moving forward.

Finally, March 21 was Mother’s Day – and on this occasion a tribute must be paid to mothers of Lebanon who played a big role in movements for peace throughout history. Today, many of them remain stranded by their grief as they await their “disappeared” sons, kidnapped and imprisoned during decades of civil strife. Mother’s Day this year coincided with news that missing sons had been found, offering a respite from suffering to many mothers who have grieved too long.

Freedom of women in Lebanon is not measured by the commercialization of “openness” or “Westernization.” It is a matter of who decides the way people live, and whether everyone has equal right of access to development services. Issues of accountability, awareness of rights, monitoring of abuses, NGO involvement in constant reporting of women’s status, and action for equal opportunity to produce and consume, are key.

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