TBY talks to Murat Gülkan, Chairman of Arma Capital, on running the first non-bank hedge fund, investment strategies, and the strengths of Turkey's capital markets.

Murat Gülkan
Murat Gülkan joined Bender Securities in 1996 to establish the Research Department and headed the research effort until June 2004. He was one of the managing partners at Bender until June 2005, when the firm was wholly acquired by Deutsche Bank. He joined Deutsche Bank London in November 2005 as Co-Head of European Emerging Markets Sales and returned to Deutsche Securities Istanbul in 2007 as a Managing Director and the Strategist for the company. Murat has been working as the Managing Partner and Strategist at Arma Capital since 2008.

You are running the first independent non-bank hedge fund in Turkey. What does this mean for the country?

We need to put this in the context of the maturity of the industry overall. For the recent development and increased sophistication of finance in Turkey, the fund management sub-sector is remarkably undeveloped considering the other aspects of the Turkish economy. Turkey has a very strong and competitive banking sector, and the brokerage sector is also strong. The fund management sector has, however, remained embryonic for a number of reasons. There has been a lack of transparency and competition, and this has been the main reason. Other reasons, until fairly recently, include the typical volatility and high interest rates associated with any uncertain emerging market environments. Our fund represents something of a breakthrough in the market in the sense that it is arguably one of the only funds that competes on the basis of returns to investors. When you look at the current state of the fund management sector now, you find that the industry has, to put it mildly, had a hard time creating any value for clients. The structure of the industry at the moment is more a result of the distribution strength of the incumbents rather than their fund management skills. As an independent player in this market, we represent a new approach in the sense that our interests are entirely aligned with those of the clients. Providing value-added to clients is somewhat a matter of life and death for us.

How has the fund been performing of late?

We have sharply outperformed the Istanbul Stock Exchange (ISE) 100 since inception in late 2010; however, past returns are of course no indication of future performance. Unlike other funds in the market, this is the first on-shore regulated hedge fund in the sense that we do not do anything terribly exotic, and we aim for absolute returns irrespective of market conditions. If you claim to have some fund management skills, this is the vehicle via which you will be able to display those skills. The flip side of the coin is that the vehicle provides no excuses for sub-par returns. Even if the market is down 30% we still expect to make money. Like I said, that helps keep us on our toes to really make money for our clients.

One method you employ to ensure returns regardless of market conditions is short selling. This phrase has garnered a negative connotation since the crisis. What can you say in response to that?

It is a testament to how ill-informed public opinion can be that short selling has acquired such a negative connotation. In an ideal world I would have hoped for inflating bubbles to have acquired more of a negative reputation, as I believe that is the bigger crime, and where the true ills lie. Years and years of irresponsible behavior from regulators to market participants led to a massive bubble, and it seems unfair that short selling has been branded in the way that it has.

Do you feel the regulatory response to the crisis worldwide has been appropriate?

The response has been criminal. We are seeing the mother of all wealth transfers from savers and taxpayers to speculators and risk takers. I believe risk takers should be reacquainted with the risk side of the risk-reward equation. For example, the “bailouts" of countries such as Greece have been sold to the taxpayers as a bailout of the country, when in fact it is nothing of the sort and merely a bailout of creditors to those countries.

Greece still owes 100 cents on the dollar, so it has not been bailed out; what has happened is that the debt has been transferred from the private sector to the public sector. All the hedge funds and irresponsible banks that should have taken a haircut were effectively given lifeboats to get off of the sinking ship. The majority of Greek debt is now held by the ECB and the IMF, which are of course taxpayer funded. Now that the transfer has been completed there is talk of debt restructuring. This should have occurred back in May 2010, and people who lent to Greece and collected interest and CDS premiums should also have taken a haircut. The policy response will go down in history as a blatant case of regulatory capture. As this becomes apparent the inevitable taxpayer revolt will foster extremist political rhetoric in the opposite direction. So not only was the current bunch of regulators asleep at the wheel when the car crashed, but their response was also lacking.

Whenever they were faced with a choice between Wall Street and main street, Wall Street won out. Like I said, this will have far reaching political effects, such as the Tea Party in the US. It ultimately runs the risk of creating an environment where the notion of free markets in the market will be jeopardized, as the average taxpayer who had nothing to do with speculation has received the short end of the stick. Their savings have been impaired, and what little they have left is earning zero so that the banks can climb their way out of the holes they dug for themselves.

What can you tell us about your investment strategy, and what are the strengths of Turkey's capital markets?

Turkey has been fortunate in the sense that it experienced a crisis seven or eight years before the global crisis. Turkey hit the wall pretty hard, and the policy response was robust and correct. The environment that succeeded the crisis allowed for far reaching structural reform here. This would not have been possible under ordinary circumstances. In place of the crony capitalist structure we saw the establishment of a strong institutional framework. In key areas of the economy and the decision-making process, authority was transferred to certain independent regulatory bodies such as the Banking Regulatory and Supervisory Agency (BRSA).

Under normal circumstances it would not have been possible to enact these reforms, and was only possible under the gravest of circumstances. When the global crisis hit, Turkey had managed to pull itself back from the brink. Debt to GDP was around 90% in 2002, and it is now around 40%. The public sector deficit to GDP was in the high teens, and it is now hovering around 3%. Turkey is ironically one of the very few non-EU countries that can satisfy the Maastricht criteria. In a world that is grappling with recession and very high public debt levels, Turkey, in stark contrast, has its public finance house very much in order. Again, the resulting improvements in the regulatory environment have led to a huge increase in competitiveness, and this has led to growth. We sometimes have to pause to remember that these political decisions need voter approval, and high growth lubricates the wheels in that sense. This has greatly improved the quality of public debate and policy innovation. For the first time in several hundred years, we are seeing fairly transparent governance in this country. In comparison to the fiascos of the 1990s, it is refreshing to see the level of public debate and policy formulation here. Going forward I think it is leading to a more prominent position for Turkey in global politics, and the country has done well to expand its sphere of influence. Again, these overtures very much fed into supporting the economy.

What is your outlook for the Turkish economy and for your hedge fund?

For the first time in quite a while Turkey's fate is in its own hands. It is not captive to circumstances beyond its control. Success or failure will lie with the choices that Turkey itself makes. Unless Turkey shoots itself in the foot I'd say its prospects are very good. Life will not be a walk in the park as far as the financial markets are concerned because the course of a country and price movements are not necessarily correlated with anything meaningful.

For the hedge fund we can say that everything is so far so good. Like I said, we strongly feel that this is the correct vehicle for investing in Turkey. That said, it is a new proposition for the majority of local investors. As you may know, because of the volatility of the stock market and some other reasons such as very high interest rates, the number of equity investors in Turkey has been stagnant for about 15 years. The investing public has overwhelmingly gravitated towards fixed income investments, and fixed income investments only.

It is only this phenomenon of new rates that is compelling investors to look for alternatives, and a hedge fund is a relatively new option. To this extent market education is required. When awareness rises the potential will be huge. To give you an idea, the total mutual funds under management account for approximately 3.2% of GDP, which is an extremely low number. In other developing countries the number is typically between 35% and 100% of GDP depending on the level of development. What is more is that of that 3.2%, 2.7% is actually money market funds, which are nothing more than a poor substitute for bank deposits. As a true investment product, we are talking about something less than half-a-percent of GDP. That can double every year for the next 10 years and still be nowhere near global standards. So, the potential is huge.