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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Business

Putting Ksara on the map

by Executive Staff
written by Executive Staff

In the March issue of EXECUTIVE, we reported that, Lebanese wine producers exported around 2.2 million bottles of wine in 2005, a year-on-year increase of 13%.

Over the same period imports of foreign wines dropped from 977 tons in 2004 to 874 tons in 2005, a drop of 11%. The UK is once again the biggest importer of Lebanese wines, followed by France, the US and Syria. Château Ksara, Lebanon’s oldest and biggest wine producer took the lion’s share of Lebanese wine exports in 2005 with an impressive 40.5% market share of all Lebanese wines sold abroad and in doing so recorded a 16% year-on-year increase of its foreign sales. “Basically we sold 1 million bottles abroad,” said managing director Charles Ghostine, who cited Syria and the UK as the main growth markets with year-on-year growth 50% and 30% respectively. The winery’s mid priced red, Reserve de Couvent, again proved to be the motor behind the export surge making up 38% of all Ksara’s international sales.

And it is all down to one man.

Dreams

Export manager Elie Maamari is enjoying a rare moment in his Beirut office. On the wall is his winemaking degree from the University of Toulouse and his Chevalier D’Ordre du Merite Agricole from the French government for services rendered. Across from his desk is a map of the world on which Maamari has placed pins in every country where Château Ksara has a presence. “My dream is too fill as much of that map as I can. We are in 23 countries, but we should be looking to China, Taiwan and Hong Kong. Did you know that in China they planted 50,000 hectares in one year? This is out of this world!” When you stop to consider that Lebanon has at most 1,700 hectares under wine vine, it is easy to see why Maamari is in awe.

It is mid-January and he has just returned from the two-day Decanter Fine Wines show in London. “Most of the people who come to the stand they have only heard of [Château] Musar,” says the man who began his career at Ksara in the accounting department in Beirut in 1978. “They come looking for something else and they are pleasantly surprised. I tell them it’s a different process of vinification, fermentation; it’s a different wine altogether. I tell them if they are looking for Musar, they won’t find it here.” He pauses. “Don’t get me wrong, Musar is a unique wine. You won’t find a wine like it anywhere in the world.”

Maamari enjoys seeing the reaction on people’s faces when they first taste Ksara. He is supremely confident in his wines that he knows it is just a matter of spreading the word. “Mostly they were pleasantly surprised by the quality to price ratio of the Reserve du Couvent, but they were also impressed with the Château Ksara 2001 and 2002, the Cuvée Troisième Millénaire and the Chardonnay. They come to taste one or two wines and end up staying for the whole range.” He laughs. “When people stay, it’s a good sign."

In the UK, Château Ksara has proved that, like Massaya and more recently Château Kefraya, joining forces with an established distributor, in this case the House of Halgarten, is crucial to breaking into the $14 billion UK market, one that could finally establish Lebanon as the ultimate boutique producer.

And Maamari is bullish. “This year exports are beginning to show,” he beams. “Halgarten agreed to our marketing plan. I asked for 10% growth and they promised 25% and I am sure they will do it. Now we are in more than 90 English restaurants and wine bars. We are moving beyond the Lebanese restaurant sector. That said, we are present in every Lebanese restaurant in London, Oxford and Brighton. The important thing is that are they re-order and they are. We are really very optimistic.”

Restaurant trade

And he should be. Lebanese food has proved to be the best ambassador for Lebanese wine. It is the third most popular ethnic food in the UK, a position it has reached through offering vegetarian dishes in an age of healthy eating and national paranoia over the dangers of eating beef. Château Ksara is the house wine at Noura and Marroush, which has 17 restaurants in London. “Marroush takes 6,000 cases (72,000 bottles) from me each year. On each table he has a special wine list with the history of Ksara on one side and the history of Marroush on the other. All 11 of our wines are on it. Sure there is another, separate wine list, but who wants it when you have all the Ksara range.”

Maamari admits that it is slightly more difficult to break into the off-trade, although there are signs that a Lebanese wine might eventually make it onto the coveted supermarket shelves. “We are focusing on [leading UK supermarket chain] Waitrose. They like the Reserve, but it takes time, as much as two years, to get a decision. What we have on our side is that, unlike many new world countries, Lebanon does not have thousands of producers and we can offer value for money, if we can sell in the £5.99 ($10.50) range.”

Ksara’s announcement that it will increase production to 2.7 million bottles over the next four years will not have come soon enough for Maamari’s customers. “Demand is already exceeding supply and I am notifying my suppliers that I am already out of Chardonnay 2004, while this has been the case with the Reserve du Couvent for two months now.”

Currently Ksara’s fourth biggest market, Maamari believes the UK will eventually take the top slot, overtaking Syria, France and the US. “The French market is defined by the Lebanese on-trade,” he explains. “There are 122 restaurants in France and not more than 50 in the UK, but there are fewer opportunities in the off-trade. Of the other markets, Sweden is a loyal customer. “My agent orders like clockwork. He takes a container every 40 days.”

Sentimental attachment

Maamari was appointed sales manager after he spent three years in France studying wine making. He admits that he was reluctant to leave his beloved wine making (a job he had fallen into during the war when Ksara’s French wine maker was absent for long periods). “It was like changing careers, but there are choices to be made and decisions to be taken. However, one thing was certain: I was convinced by the quality of the wines and I knew we would make progress when European consumption increased. My first job was to hit the Lebanese restaurants and convince them to move away from selling cheap Bordeaux just because it came from Bordeaux.”

Spreading the gospel to those who can influence wine drinking is another challenge. Château Musar still looms large in the consciousness of many a wine critic. “It is not easy to convince the big names such as Tom Stevenson, Jancis Robinson and Oz Clarke that there are other wines than Musar, but we are getting there slowly. They have the power to sell wines. They are celebrities they have newspaper columns.”

Still the good news is that Lebanon’s strength lies in its relative rarity. Maamari admits that he had no idea how much wine the rest of the world produced until he went abroad. “It’s strength is its rarity. Halgarten finds it easier to sell Lebanese wine than Australian because there is so much competition. They consider us a jewel in their crown.”

Sitting in his office, Maamari can look back with pride on a remarkable journey in wine. “It has changed my life. And wine is a great communicator. When wine people are gathered you can sit down with someone and talk for hours about wine and then you realize you don’t even know his name. When I joined Château Ksara I could have been joining any company. Wine meant nothing to me. In fact I nearly joined Sohat. Now I am a trained oenologist and a member of the French oenologist committee and the French association of oenologists. I am also a permanent member of the OIV wine tasting board. Winemaking remains my first love. Whenever, I go to Ksara I feel sentimental. Remember, I worked there for 11 years.”

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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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Economics & Policy

Bursting bubbles in the gulf

by Faysal Badran
written by Faysal Badran

We have mentioned over the last six months, that the Gulf markets, and in particular the Saudi stock market had gotten ahead of itself. The metrics we used were always simple to understand: the market capitalization had surpassed the national productive economy by a measurable distance. In fact, at its peak in February of this year, the market capitalization of Saudi Arabia at its peak had reached nearly four times the value of the GDP. To put this speculative fervor in perspective, at its manic NASDAQ-driven peak, the US market capitalization had hit 1.75 times the GDP. We use the Saudi market for analysis since it is the largest of Gulf markets, and actually has become one of the largest emerging markets in the world.

The flood of IPOs in a fairly arcane and unregulated market led to an unhealthy, almost parabolic trajectory. This, coupled with excess small public participation as well as an over zealous margin trading (day trading on borrowed money) has led to the inevitable and dramatic fall. So far, at the time of writing, the Saudi market has lost 30% of its value from the top, or nearly $200 billion, yes billion.

Though we did point to the high risks embedded in the Gulf markets in two articles, the devastation is truly awesome. Even the most pessimistic of analysts did not except the decline to come so swiftly, and what is more eye-popping, is that rather than allowing the market to adjust to more reasonable valuations, the authorities, asleep at the wheel when it came to reigning in speculation and lending, suddenly, panicked and stepped in to attempt to cushion the fall.

As we all know, perhaps the most damaging type of government intervention is when political leaders try to swing markets. There are many historical examples of failed attempts, the most spectacular that come to mind are the US attempts to stop the crash of 1929, and the twelve years the Japanese spent trying to stop the Nikkei’s collapse from 39,000 to nearly 8,000. Needless to say, I truly believe that not only is government intervention futile, but it can actually accelerate the fall, creating a larger frenzy on the downside. The purist in me might ask why would any government even want to prop up speculation? It seems absurd, but many governments do it.

Jawboning

Recent attempts at reversing markets were characterized by jawboning, i.e. talking up the market, much like the internet analysts did in 2000 prior, during and after the meltdown. The talking heads go on television claiming that the fall is “exaggerated” and the economy is fine. It may very well be, in fact the Saudi economy is more than just fine, it is growing faster than most emerging markets and government and capital spending is up sharply, but even the strong growth does not legitimize the outlandish market valuations with less than stellar companies going public.

As the authorities showed, accentuated laxness in allowing shady companies to list and an amateur public to speculate they, in effect, fanned the flames of the inevitable boom-bust cycle. In most Gulf markets, authorities are also attempting to make what they deem as “structural” moves to stop the falls. For instance, Saudi is allowing non-Saudi residents to invest as of the end of March. But at this stage, who wants to catch the proverbial falling knife? A 30% fall is not simply a garden variety “pull back” or healthy correction as some pundits like to call it, it’s a calamity, and it indicates some serious technical damage. Once this process begins, and especially at such a high level of excess valuation, little can and should be attempted to stop it. It is simply a market adjustment phenomenon tied closely to human behavior, which is summed up in two extreme modes of conduct: greed and fear. Once the greed is replaced by fear, the process is a long one, and in some cases, Exhibit A Japan, may take decades.

Foreign participation

Propping up the market not only doesn’t make sense and is not a clear mandate for governments; it also means that governments, in any attempt to buy the market is wasting precious cash, which will be unavailable for other ventures. My guess is, a broader participation of foreign players from the get go, would have perhaps provided the market with a healthier backdrop.

Here are some numbers for Gulf markets. The Abu Dhabi Securities Market has so far lost 23.4% on the end-2005 close of 5,202.95 points and 37.7% on its all-time high. The Kuwait Stock Market dropped 1.1% to close below the 10,000-point mark at 9,939.30 points, 13.2% below its 2005 close of 11,445.10 points. The Doha Securities Market dropped below the 9,000-points mark to close down 4.4% at 8,873.08 points. It is 19.7% below last year’s close of 11,053.24 points.

In this context, one wonders, can the Beirut bourse withstand any gravitational pull? So far the answer is no. Since the fall in the Gulf markets, Solidere and the main “money center” banks are off by nearly 20%. Many will have you believe that the reason for the Beirut fall is the political situation, but while the shenanigans of the decaying political system may not be helping, the true culprit for the most part is the fall in the Gulf markets. First, the mood of Arab investors and therefore their appetite for risk declines as they get hit. Secondly, as they get margin calls and they need to cut risk in their portfolios they will liquidate their assets abroad, once they have made some decent gains. Of course, had the political situation been better, the fall in Beirut may have been smaller, but there still would have been a sizeable pullback. As oil and stocks have fallen in tandem, the rationale for risking some cash in illiquid markets such as Beirut fades.

It is certain that the attempts at stopping the market fall in the Gulf will ultimately fail, as every single government intervention historically has, but in the interim, there will be sharp upswings. And while it is true that the Lebanese market does not suffer from the same overvaluation as the Gulf, at their peak, banks in Lebanon were trading at multiples associated with global banking powerhouses, an unreasonable state of affairs, despite their strong results and the astute banking culture of Lebanon. In sum, as long as the Gulf markets are hit by selling, it is tough to envisage a very rosey outcome for Beirut stocks, and even the most perfect political denouement may not be enough, as stocks in Lebanon are already up massively from their lows anticipating better times ahead. Some foreign funds may be tempted to jump in should the political situation improve, for a tactical play, but too many fiscal and economic bumps are straight ahead to look for anything more than speculative spasms.

In the long term, I do believe that there is room for improvement in Beirut equities, and for the bourse to attract foreigners and Arabs. For now, the main focus has been on debt securities (bonds) as the government has had to borrow excessively to finance reconstruction, but eventually, as more family businesses are incentivized to list, and a proper equity culture develops, Beirut can place itself on the regional market map. This is a tall order, though, as this will require a better environment, both political and economic and frankly, more credible leadership and clearer policy. Ideally, most emerging markets must undergo genuine reform in order to attract the larger players, i.e. the US and European funds.

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Finance

Listing to live

by Nicolas Photiades
written by Nicolas Photiades

When implemented sometime during 2008, the Basel II Capital Accord will demonstrate that the entire Lebanese banking sector will be in need of extra capital to cover up the underlying risk of their assets. Most banks are expected to see a drop in their capital adequacy ratio (equity divided by risk weighted assets) from an average of 21% for the sector to a level below 6%-5% (for some banks even more). Lebanese banks’ capital adequacy ratio will then be below the minimum regulatory capital ratio of 12% as established by the Banking Control Commission (BCC) a few years ago. In other words, the entire Lebanese banking system will need a whopping $5.7 billion (current equity is $4.3 billion) of extra capital in order to reach the minimum regulatory capital adequacy ratio of 12%, or $2.6 billion if the BIS CAR is to reach 8%.

This sudden drop in capital adequacy will make local banks realize, not only that they need to increase capital significantly but also that they need to assess risk in more details and more professionally, and that they will need to obtain capital funding flexibility. Under Basel II regulations, capital is expected to fluctuate constantly at first, as banks try to find optimization of their assets in terms of credit risk and risk weightings. This capital fluctuation would crucially require an equity funding flexibility that can only be obtained through a listing on a recognized stock exchange, which also enjoys strong liquidity in a developing secondary market.

A listing, which would be an initial public offering (IPO) for most banks (only a few are already listed) would also force transparency and a certain operational and market discipline for all new entrants. Any CEO of a bank facing a capital shortage as a result of Basel II should not only seek to increase capital in order to meet regulatory requirements. He or she must be asking him or herself whether they have the right stuff to go through an IPO. Taking a company or a bank public is a grueling affair, even in Lebanon, especially that the CEO will have to manage the process in tandem with day-to-day work, which is already hard enough. The senior management team may need strengthening, replacing or overhauled. Products and revenues will have to be diversified to create long-term, healthy and recurrent profitability. Investors would never look at a Lebanese bank IPO if all these criteria are not met.

Sooner rather than later

Even if internal and operational issues are covered, banks must be able to time their IPOs correctly. They must start increasing their capital today or at least enquire about conditions for a listing with the BSE. Increasing the capital through an emerging market bourse takes double the time it normally takes in a developed market. The idea of gradually increasing capital after thoroughly preparing the IPO, starting from today should be taken seriously and constitute a major strategic challenge.

However, if all banks carry out their IPOs at the same time, especially if it is soon after Basel II regulations are implemented, then there will be a few winners and a lot of losers. The Lebanese and regional market has no room for 40 Lebanese banking IPOs at the same time and the BSE will certainly not be able to cope with such a bottle neck. In general, most IPOs worldwide are carried out earlier rather than later. In Lebanon, banks could set a first by trying to list too late, a result of sheer desperation in the face of a forceful set of international capital adequacy regulations.

Banks should not only think about increasing their own capital. They should also be advising their corporate customers to get themselves more equity funding flexibility, particularly those corporates which have established successful franchises. By increasing their capital through the local equity capital markets, Lebanese corporates would enhance their credit strength and debt capacity significantly, as they would become more transparent, be forced to follow a strict market discipline that normally accompanies a listing, and be able to finance their development with capital rather than debt. The end result would mean a much better risk weighting of their credit exposure with their bankers, and consequently less capital for the latter.

Basel II is regarded as a constraining evil by bankers worldwide. For Lebanon, it could be the trigger for a healthier economy and exponentially greater competitiveness. From 2008 onwards, no Lebanese bank should have the right to look back. As Brutus says in Julius Caesar, “There is a tide in the affairs of men, which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures.” Enough said.

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Economics & Policy

An unbeaten Risk-Taker

by Stephen Schurr
written by Stephen Schurr

Even for the most extra-ordinary skier, neither acumen nor experience can prepare oneself for the mortal threat of an avalanche. Philippe Jabre learnt this last year.

In February 2005, Jabre, then the star trader for London hedge fund GLG Partners, was skiing in Courchevel with his wife Zaza, a client and two guides when a huge mass of snow rapidly descended upon them. When the avalanche hit, his wife was submerged. Jabre and his companions spent 23 minutes trying to find her and dig her out, with the odds of her survival dwindling by the minute. Miraculously, she survived, capping her recovery in January with a return to the slopes at the French ski resort where they own a home.

Survivor

Jabre also faced down two powerful forces in his professional life in 2005 that threatened to submerge him. The first was a near-cataclysm in the credit market that put his GLG Market Neutral fund down 18% through May. The fund posted a remarkable recovery, capped by a double-digit return in December that put it up 5.47% for the year.

The second was the UK Financial Services Authority’s investigation into his February 2003 trades in Japan’s Sumitomo after he received information about a coming convertible-bond deal from Goldman Sachs. It was the most high-profile regulatory probe in the history of the London hedge-fund community.

The latter reached its conclusion this week, with the FSA’s Regulatory Decisions Committee deciding to fine Jabre and his former firm GLG £750,000 apiece, determining that the trader and, in turn, his firm violated market conduct and committed market abuse.

The fine against the 45 year old Jabre was the largest ever meted out to an individual. Despite the penalty, the RDC ruling marked the third time Jabre evaded a dreadful fate. The judicial panel decided that Jabre did not deliberately commit market abuse, ruling that he did not violate the FSA’s Principle 1 governing market integrity. Against the FSA regulators’ recommendation, the RDC opted not to ban or suspend Mr Jabre.

That he emerged with his license intact can be seen as miraculous in some regards. When the two-year investigation came to light last year, it seemed to many in London’s hedge fund set a clear-cut case that would end with Jabre’s head on a platter. As the investigation wore on, the details became less clear, as is often the case regarding the nebulous terrain of information exchanges between investment banks and hedge funds.

A legend

The decision ensures that Jabre, for two decades a prominent fixture in London’s investment community, will have a third act – the first being the spectacular success, the second his near-demise under regulatory scrutiny and the third his potential return to running money. The course of the third act may not go smoothly. He will not be returning to GLG and he must re-register to run money if he plans to start a new fund – meaning the FSA once again holds the key to his future.

Jabre was not available for comment. But several prominent individuals in the London hedge fund community said that whatever the outcome, the third act will be as closely followed as the first two because of his stature.

“Philippe is a hedge fund legend,” said a manager at a London fund that operates some strategies similar to GLG. “He is a born money-maker, and there are very few of those out there, even in the hedge fund world.”

Jabre’s personality, according to those who know him well, is that of the quintessential hedge fund manager, only more so. The price of a ticket to this world is an extreme degree of competitiveness, high intelligence and innovative thinking. Jabre established a reputation at a young age in the London investing community as both a risk taker and a brilliant trader. He earned an MBA from New York’s Columbia University in 1982, trained at JPMorgan and soon made his way to BAii, a division of BNP, the French Bank. In his 16 years there, he specialized in the budding market for convertible arbitrage, a strategy that involved buying a company’s convertible bonds and selling short the company’s stock.

Jabre acquired a reputation among critics for operating aggressively. In 1997, he joined GLG Partners, a hot two-year-old hedge fund started by former Goldman Sachs bankers Noam Gottesman, Pierre LaGrange and Jonathan Green. It was developing a reputation as a player in the burgeoning London hedge fund industry, in part on the strength of its access to new offerings, and Jabre’s convertible arbitrage brought a new dimension. “It’s ironic now, given the investigation, but one of GLG’s big moves toward legitimising themselves as a firm was getting Philippe,” said one hedge fund manager who was active in the 1990s.

Jabre’s Market Neutral fund grew to more than $4 billion at its peak, returning 23.1 per cent returns on average after fees between 1998 and 2005. According to individuals familiar with his investing style, Jabre’s ability to beat the benchmark by 18 percentage points a year on average was his push to move away from convertible arbitrage and toward more opportunistic trading across various asset classes.

GLG helped Jabre, who has four children, become a rich man, with his personal fortune estimated at £180-£200 million, enabling him to concentrate on charitable efforts, including a focus on Lebanese causes.

However, the two-year FSA investigation caused an irreparable strain in the relationship between GLG’s senior ranks and Jabre. Individuals familiar with the firm say GLG came to view Jabre as someone who took unnecessary risks. One individual described the rift as akin to “a rock group that becomes huge, where their success leads to their eventual break-up”.

Own firm

While Jabre officially remains on leave, individuals say he will not return to GLG. Jabre will almost certainly look to raise money for his own firm. Some individuals say the FSA could decide to block any attempt by him to set up a new fund in London. But other hedge fund industry participants, however, say the FSA would grant him approval since the RDC did not suspend him.

And no one is questioning Jabre’s continued ability to attract investors. Said one hedge fund manager: “Somebody was asking me the other day whether he could raise money if he starts running his own hedge fund. My God, he’ll almost be killed in the rush.”

Stephen Schurr is the London-based hedge fund correspondent for the Financial Times. Copyright 2006 The Financial Times Limited

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Comment

Capitalizing on defeat

by Yasser Akkaoui
written by Yasser Akkaoui

We business journalists are often invited to dinners and lunches along with many heads of private sector companies. Without fail, we are asked about the outlook for the economy, as if, in our opaque world, the press has its own special-issue, X-ray glasses.

The answer is normally a variation on a rather depressing theme: that we tend to hear what the government isn’t doing rather than what it is. Simply put, there is no national plan with which to asses the state’s vision, especially as the year to date has been characterized more by politics than economic strategy, which appears to have not been included in the so-called national dialogue.

In fact, anyone would think that the role of the government was just to manage the debt, that or offer us conflicting outlooks for the fiscal and monetary situations. At ministerial level, we have not heard much from Mr. Haddad at Economy and only the tiniest of squeaks from Mr. Gemayel and his bumper sticker campaign at Industry. Where are our plans for agriculture, industry and tourism? Don’t tell us that there are no more jobs to create or no more natural resources or assets to exploit. We just don’t buy it. Stop telling us what we can’t produce and start telling us what we can. So where is the plan?

You see without a plan there is no speculation and without speculation there is no investment and without investment there is no growth. Or are we just happy to be a good-time country living off birds, booze and beaches.

In this month’s special section, we look at the recent interest in Lebanese real estate. We can identify pockets of initiative to encourage speculation, flowering in what is still largely a wasteland. If we are so clever, why have we not taken a leaf out of the books of recent regional success stories and use property development as a vehicle for investment? The government should grasp the nettle and initiate this culture or at the very least invite those who can, to come and do so.

But sadly till now we have heard nothing. So this is why the last time I was asked about the economic outlook I turned to the gentleman and said. “You are on your own but you have succeeded nonetheless. For the time being stay that way, for it seems we can only rely on ourselves.”

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The Buzz

Me, Myself & I-Mate

by Yasser Akkaoui
written by Yasser Akkaoui

When it comes to PDAs I am a virgin user. So far, they held little attraction. I am a minimalist kind of guy I suppose. For me a cell phone is for making phone calls. I don’t use the camera neither the alarm nor reminder functions and I don’t really send text messages. My one concession to options is my subscription to Clip Plus, a service that tells me who has called when the phone is off.

So when I was offered a complimentary, all-singing-all-dancing I-mate JasJar worth around $1,200, you will forgive me for telling you I did not get into a lather of excitement. I was hesitant to take such a huge technological leap.

Essentially, I am a self-conscious kind of man. I don’t like to make an obvious statement of what I can afford or where I have reached in life, by what clothes I wear or which watch I have on my wrist. The same extends to my choice in telecom accessories. I don’t need to be seen to be speaking into a piece of NASA hardware to feel secure. So the size of the Imate was a novelty and took some getting used to. Yes, I was worried that people might think I had just stepped off the boat from Dubai with my duty-free gizmos ready to cut a dash in provincial Beirut. Still, I pride myself in my positive outlook and decided to give it a go. After all, apart from my image, what did I have to loose?

The I-mate JasJar is undeniably big, heavy and wide. It is not discreet and it is difficult, if not impossible, to pass unnoticed when talking on it in public. But it is slim and, if carried without the carrying case, can fit neatly and unobtrusively into one’s inside jacket pocket without spoiling the cut of the suit. Still, you know it’s there.

The cover is however, there for a purpose. The screen is delicate, as two friends of mine found out when their screen cracked (one had to send his Imate – along with all the stored data – to Dubai to be fixed; an inconvenience to say the least). The good news is that, in the name of research I tried to break my new toy, but was unable to. Maybe I just look after things.

Novelty value

So what about the performance? Well, first off, Configuration is quick. I was expecting to go to hell and back before I could get it to work but it took a mere 10 minutes. Then it was a case of which screen to use. Did I go with the fold-out format, not unlike that of a laptop, or did I opt for the more space-age, touch-screen method? As a child of the laptop generation I went for the latter, but given current habits it might also depend on whether or not you have a driver (my logic being that you can use the keyboard easier in the comfort of chauffeur driven luxury). That said we should never encourage people to send text messages while driving should we?

What really made my day however, was the SMS facility. As I have said I am not really text kind of guy. Even people who send me SMS messages will get a phone call in reply. However, the JasJar allows you to send SMSs on a Microsoft Outlook email platform and on a recent business trip I found I was saving a fortune in phone calls by using this very civilized and professional option that allows you to manage your messages like e-mail.

I was also able to access the internet where there is WIFI hosting. While I quite enjoyed the novelty of sitting in a lounge (T-Junction of the Emirates Tower as it happened) and logging onto to Yahoo, it is not my thing and I have never fully understood those who need to do their work in public. That said, if I had transferred my emails onto the JasJar, I might have been as busy as the proverbial bee.

For those who can’t stop themselves, the JasJar comes bundled with all the standard Microsoft software – PowerPoint, Word, Excel etc. – so they will never be caught short. Would I buy one? Honestly? I liked it, but would prefer something smaller like the I-mate JAM. But then again, I have not made that crucial lifestyle leap…yet.

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The Buzz

Handheld butler

by Executive Staff
written by Executive Staff

There has been a lot of hype surrounding the Vertu mobile phone, arguably the ultimate in personal communication. The phone also comes with what it calls a Concierge service, an equally exclusive option for those people on the go, who like things planned ahead of time wherever they are in the world. EXECUTIVE wanted to know more and went to Karen Bou Fayad, Vertu’s marketing and public relations manager in Lebanon for the lowdown on one of today’s must haves and its bespoke customer service.

E When did Vertu decide to establish the Concierge service and what was the corporate philosophy behind it?

The idea of establishing the Concierge service came in the earliest phases of the development of Vertu. The whole philosophy of the brand was to create an unforgettable experience to his clients. What makes Vertu so special is the obsessive attention to details and the craftsmanship that is behind each product. Each component was selected in order to make the use of a Vertu phone an unparalleled experience: The scratchproof sapphire crystal screen, the jeweled ruby bearings under each key, the exceptional sound quality, and the hours of work spent in the assembly of a phone, the level of performance, etc. To compliment this experience, Vertu decided to offer his clients the unique Concierge service, an integrated customer experience, where the service is accessed directly from the phone simply and easily by way of a dedicated button on the side of every phone. This is unique to Vertu and is not available on other phones. Neither are other services so instantly and easily accessible.

E Fair enough. How many Concierge users are there in Lebanon? What percentage of Vertu users, both in Lebanon and abroad, have signed up for Concierge?

Concierge is complementary for the first year, but a lot of our clients are so satisfied with the service and find it so useful that they subscribe to it at the end of the first year.

The frequency of usage of the Vertu Concierge can be very different from one client to another. The most frequent requests the lifestyle managers get are information about hotels, restaurants, theaters, concerts, musicals, sports events and so on. Unfortunately, we can’t disclose detailed figures on the percentage and the number of Concierge users.

E How much does Concierge cost and what services are on offer? What is the most used Concierge service?

As mentioned earlier. Concierge is a service that comes with every Vertu phone. The Vertu clients gain access to a dedicated team of lifestyle managers, capable of helping them get the most out of their valuable free time. The service is available 24/7 in English, French, Italian, Russian, Mandarin, Cantonese and German. There are three kinds of service: Support on issues related to Vertu and Vertu products, questions regarding the phones, the distribution, the company, etc. Secondly there is an emergency service in which we can put the client in touch with doctors and organize car repairs and services and lastly there is the Lifestyle service through trips can be organized and restaurants recommended and booked. Concierge can also give shopping advice. All three services are widely used by our clients. The lifestyle service is highly appreciated for the quality of the work and the recommendations of the Concierge managers.

At the end of the first year, clients will continue to be supported on issues relating to Vertu products. Those clients wishing to subscribe to ongoing lifestyle support can do so. There are two levels of service. The standard service, similar to the level of service received during the first year, is available for £650 ($1,140) per annum. Those who wish a more bespoke and personal service can subscribe to VIP service at £3,600 ($6,300) per annum. This includes a personal lifestyle manager who oversees all requests relating to a small group of specific clients

E Can you give us some real life examples of how Concierge is used?

Certainly. A woman recently wanted to arrange a small 21st birthday gathering with friends in Switzerland. Vertu Concierge recommended the perfect location, managed all contact with the venue and even organized drinks, food and a cake for the event. A regular business traveller used Vertu Concierge to arrange a last-minute trip including all flights, car hire, accommodation and a gift to thank his hosts at the end of the trip. The client particularly liked dealing with one person, who had responsibility for all of the arrangements. One Vertu client was head over heels in love with the red pair of shoes of her dreams and had tried in vain to bribe the sales team of a very famous luxury brand store to strike a name from the waiting list and replace it with hers. Even the brand’s customer service couldn’t help. The shopping specialists of the Vertu Concierge knew that those shoes could only be bought at the firm’s own stores, so the selection was limited. They telephoned the entire brand’s stores in the world, negotiated with the sales managers, had the staff of the headquarters rummage through the stock room and finally met with success. A few days later, a courier brought the client’s house the pair of shoes of her dreams.

E Phew! Ok so what is the profile of the Concierge user?

Vertu’s customers are lovers of the most beautiful things in life such as watches, clothes and cars. They want to be surrounded by accessories that fit their personality and lifestyle. Most of our clientele is male. However, some models of Signature and the last Pink and White special editions have shown a very strong response among women. I would say that the profile of the Concierge user is the same than the general profile of Vertu’s clients. They are lovers of the most interesting experiences in life and expect Concierge to answer their needs and compliment their lifestyle. The requests the Concierge will receive are based on the clients tastes and hobbies. The Concierge will be asked to recommend the most select restaurant to the best pub to watch a football match!

E What do you say to those who counter that if you can afford Vertu you don’t need it?

Vertu Concierge is a personal service consisting of a team of specialists dedicated to developing a global database of international suppliers and testing these to ensure they will deliver the best service exclusively to Vertu clients. Their expertise is not limited to a country or a domain.

When a request comes through the team of experts combines his or her expertise with services held within the knowledge bank to deliver solutions in response to the client requests. They have extensive international experience, and an undeniably international outlook. For clients this means the service can be extremely useful, not only at home, but also when they travel. The lifestyle managers try to get to know each of the clients better in order to deliver to them customized personalized recommendations and suggestions that will answer the best their personal needs and tastes. The Concierge users are therefore sure they can receive the best assistance at any time and in any part of the world they are living in or traveling to.

E How many establishments have signed up to be part of the Concierge infrastructure? What does it cost them? In Lebanon which is the sector – hotels, restaurants, car hire etc – that has responded the most to Concierge? How can we measure how much business Concierge has brought to those businesses that have signed up?

No establishment will need to sign up to Concierge to be part of its database and recommendations. As the Concierge service is dedicated to offer the best service to his clients, the lifestyle managers will only recommend the best response to their clients needs. They have an international database and strong relations with key locations and suppliers. Not only will the Concierge service will always try to update his database with the newest and the best locations and services on an international level, he will also take in consideration the clients’ experience and feedback about places or services he recommended to answer other users requests. However, the Concierge may also contact some establishments to organize special offers to his clients. The best example would be the themed offers for the owners of the Pink and White Special Editions phones, such as priority personal and Christmas shopping at Barney’s and Harrods, complementary pink champagne at the Raffles Grill in Singapore, priority booking in the Spas of the Mandarin Oriental in New York and Singapore and the Georges V in Paris and special upgrades in the Ice Hotel in Canada to name a few.

E What is the level of growth in Concierge both in terms of subscribers and those companies signing up to be listed in the service?

Since the creation of the company in 2002, Vertu has witnessed an exceptional level of growth. The Middle East region is very dynamic and I would say that, as a result of this, the number of the Concierge users is also growing in an exponential way.

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