The Iraq Fund, Iraq's first hedge fund, began trading on August 2, the day on which foreign investors were allowed to start investing in the war-torn country. This follows the Iraqi government's enactment of the new foreign investment law last November, giving foreign investors flexibility to transfer capital into and out of Iraq. Foreign investors can form investment portfolios and can trade shares and bonds listed on the ISX. The Iraq Fund focuses primarily on state-owned enterprises (SOEs), which include steel plants, cement factories and glass works, and banking sector stocks listed on the exchange.
The fund has a $250,000 minimum investment requirement and charges 1.5 per cent for management and 15 per cent for performance, with a high-water market. After a one-year lock-up, investors can redeem quarterly. The Credit Bank of Iraq serves as its prime broker and the fund is domiciled in Delaware, the United States. Earlier, Holtz was reported as stating: "We target $100 million. There have been delays, but we'd like to do it within the next 12 to 18 months." So far the fund has attracted only private investors.
"The Iraq Fund provides investors (with an investment vehicle), who have expressed interest to make intelligent decisions," said Holtz, adding: "Iraq is a challenge because of conditions on the ground, but investors understand the risk." Given the physical conditions and the potential of SOEs "we feel we can turn a profit in three to five years," he said.
Asked about the high level of risk associated with an investment in Iraq, Holtz replied: "The difference between Iraq and US is that the US is a mature market. In Iraq there are boundless opportunities and potential but the risk factor is there." He added, however, that "safe is a relative word," citing the recent crisis in the US sub-prime credit market.
The ISX, established in 2004, has 33 companies trading out of 100 listed companies, said Holtz. And according to data for Thursday August 30 from the ISX web site, 29 companies were trading and 21 were off the trading floor following decisions at their annual general meetings to increase their capital. Of those companies traded, there were 12 banks, one investment company, three services companies, 12 industrial companies and one hotel company. Overall, six companies saw their shares rise, while 12 saw them fall. Another 11 stocks remained stable.
The banking sector accounts for 71.5 per cent of the exchange's capital, which reached ID799.2 billion by April 2007. There are 18 listed banks having a combined capital of ID571.5. The pick up in the stock market is good news for its index had fallen significantly between January 2005 and March 2007, according to research on Iraq by the Kuwait-based Global Investment House. Over this period the general index performance lost more than 50 per cent of its value. The deteriorating security conditions resulted in the ISX index falling from its highest level of 72.6 points, in February 2005, to a low of 25.3 points in December 2006. Currently, the ISX index is trading between 40 and 42 points. The index stood at 40.82 points at the beginning of August and 41.90 points at the end.
The move from a manual trading floor to an electronic trading is expected to bring more liquidity to the market, especially as a greater number of foreign investors will be able to trade in Iraqi shares. This is expected to happen in October, according to a posting on the ISX Web site. Initially, however, only five of the listed companies will be traded electronically, and "we don't know how quickly it will take the other 95 companies to be listed", said Holtz.
The ISX currently trades on two days a week for two hours each day but once the exchange becomes automated trading days will increase to five days a week with two sessions per day.
Last week, the Iraqi Securities Body announced that it was regulating the broker market so that only approved brokerage companies could operate on the Iraqi security market. An approval date for the legislation was not specified, according to a posting on the Investor's Iraq forum web site.
It said that the chairman of the Securities Body, Abdul Razzak Al Saadi, had stated: "No new brokerage company would be admitted to the market with capital under one billion dinars, and no licensed banks' brokerage offices could be turned into limited (or contribution) companies without capital of minimum one billion dinars, majority owned by that bank."
He is also quoted as saying: "Current brokerage companies must ensure this year that each shareholder's stake is at least iraqi dinar 35 million and that they must build capital over the next five years to the minimum specified above."