The $ 26.5 billion fund management industry in the GCC will continue to outperform its benchmark index for the next several years, driven by strong Alpha generation by the UAE asset managers, according to analysts at a leading investment company.

Alpha is a measure of performance on a risk-adjusted basis and denotes the excess return of the fund relative to the return of the benchmark index.

The UAE fund managers generated an average Alpha of 4.6 per cent between 2006 and 2011, underscoring its outperformance.

A positive alpha of 1.0 means the fund has outperformed its benchmark index by one per cent. Correspondingly, a similar negative alpha would indicate an underperformance of one per cent.

In the GCC, only Kuwait Islamic Fund has shown negative Alpha of 0.2 per cent.

The GCC asset management industry with roughly 100 companies, manage about $ 26.5 billion in assets in 328 funds at the end of 2011, according to Kuwait Financial House, or Markaz.

Money market funds constitute the largest share in terms of assets under management, or AUMs ,(53 per cent), followed by equities (42 per cent), fixed income (2.0 per cent) and specialised funds (3.0 per cent).

“Large dividend yields, low level of institutionalisation, information asymmetry, top heavy market structure, and Underweighting small stocks are some of the reasons for outperformance by GCC fund managers,” analysts at Markaz said.

They said GCC fund managers would continue to outperform their benchmarks for the next few years. “Better market infrastructure and regulations, inflow of institutional money and MSCI upgrade to ‘Emerging’ status are some factors which can potentially make the search for alpha difficult,” they said.

Lubos Pastor of University of Chicago argues that the industry’s Alpha decreases as the size grows because alpha becomes more elusive as more money chases it. After a bad year, investors shift their alpha expectations downward and reduce investment in active funds but don’t pull out all the money.

Globally, fund management industry is going through a rough patch after the 2008 financial crisis. As markets exhibit higher volatility and with no easy fixes in sight to solve the problems of the developed world, fund managers are struggling to adapt and clients are increasingly turning restless.

“The situation in the GCC is no different as companies continue to struggle in growing their assets under management and making ends meet,” Markaz analysts argued.

On average, funds from almost all the categories generated alpha during the six year period. Kuwait Islamic funds, which generated negative alpha of -0.2 per cent, were the only exception.

“Even though fund categories generated alpha on an average basis, alpha generated by individual funds witnessed a noticeable variation. Period following the financial crisis was tough for fund managers with only one category witnessing more than 50 per cent of the funds outperforming,” Markaz said.

The analysts said medium sized funds ($ 99-$ 10 million) seem to have outperformed other categories in terms of creating alpha.

According to a study conducted by Markab Advisory, a diversified asset management industry has emerged in the GCC over the last decade.

The study, sponsored by Qatar Financial Centre Authority, said that despite its youth, and especially in the aftermath of the financial crisis, the industry has shown signs of maturity and consolidation. It has tremendous potential to graduate to the next level of sophistication.

Private equity, rather than mutual funds, will be the main arbiter of growth of the region’s asset management industry, says the study, which explores the growth and dynamics of the regional asset management industry and highlights the role that the industry can play in improving the global competitiveness of the GCC region.

The study has assessed the new factors shaping the next phase of regional economic growth and their impact on the future growth and evolution of the asset management industry in the GCC region. It discusses specific dynamics of the industry, unique growth drivers and particular challenges and weaknesses that will likely affect the growth of the industry.

The study takes a closer look at the GCC region with an in-depth coverage of key asset classes and investor groups against the backdrop of the global financial crisis.

The Institute of International Finance (IIF) has estimated that the GCC could see net foreign assets increase to $ 1.9 trillion by the end of 2012 and $ 2.1 trillion by the end of 2013 amid rising oil prices.

The region’s external current account surplus is expected to rise to a record $ 358 billion up from $ 327 billion in 2011 as energy revenues flood the region, the global financial services industry body said.

“The prospects for the GCC are impressive, yet there are clearly risks. At a most general level, there is the issue of the impact on the GCC should turbulence in other Arab countries be prolonged,” George Abed, an IIF senior counselor and director for Africa and the Middle East, said in a statement.