Hedge Fund Returns $300 Million To Saudis Over Khashoggi Killing

In a rare move, a hedge fund has returned about $300 million in investment funds to Saudi Arabia over the Oct. 2nd murder of journalist Jamal Khashoggi.

Bloomberg cited anonymous sources with knowledge of the matter after British hedge fund Pharo Management told investors it had returned the money to the Saudi Arabian Monetary Authority (SAMA) due to the heinous killing which last year shocked the world, and further has made things increasingly difficult for Riyadh in attracting foreign investment for its Vision 2030 project.

Last year's Future Investment Initiative (FII) conference in the capital Riyadh, via AFP.

SAMA, the kingdom’s central bank, invested the funds with Pharo in December, but the decision to publicly return the money has turned heads as a rare rebuke to one of the world's most powerful and influential investors.

According to Bloomberg's sources:

Guillaume Fonkenell, 54, who founded Pharo, told some investors in January that the decision was made to uphold its principles due to concerns about Khashoggi’s death at the hands of government agents last year, the person said.

The nearly two decade old global investment firm manages about $10 billion across four funds from offices in London, New York and Hong Kong.

It appears to be the first time a hedge fund has publicly returned Saudi investments over the Khashoggi killing, which many western officials and analysts have said involved the oversight of crown prince Mohammed bin Salman (MbS) himself. This also as several other companies have severed business ties to the kingdom over the well-known journalist and Washington Post columnist's death and amid heightened international scrutiny over Saudi human rights abuses in general. 

Though there's a growing risk to firms' reputations in dealing too closely with the Saudi state, it remains that no major crack in the dam has formed to send investors running, as Bloomberg describes MbS "still has the crucial support of President Donald Trump, and most Wall Street firms and a number of nations have chosen to continue doing business with the wealthy kingdom despite widespread condemnation of the murder."

Guillaume Fonkenell, Pharo’s founder and managing partner, via The Hedge Fund Journal

Saudi Arabia and its de facto ruler MbS have consistently denied that they ordered the hit on Khashoggi, while also trying to maintain a "business as usual" posture in the wake of increasingly international calls for divestment in the kingdom, or at least attaching penalties on the Saudis. 

As Bloomberg relates, the timing of Pharo's stance is also interesting, given the industry is feeling global strain:

Pharo is potentially the first hedge fund to go to the extent of refusing to manage money for the country. The decision comes at a time when the $3 trillion-industry finds itself engulfed in a fierce battle to attract capital as investors revolt against high fees and mediocre returns. Clients pulled out $37.2 billion from hedge funds in 2018, according to eVestment data.

But other big asset managers like Larry Fink, head of Blackrock, said in November that doing business in Saudi Arabia is “not something I'm ashamed of” and that he intends to continue investing there.

Saudi money still ultimately remains a major sought-after factor for western companies taking big risks:

PIF, the most well-known of Saudi Arabia’s sovereign wealth funds, has made a series of investments in companies such as Tesla Inc. and Uber Technologies Inc., as well as a $45 billion commitment to SoftBank Group Corp.’s Vision Fund.

Until recently, Saudi Arabia invested the bulk of its surplus through the central bank. Net foreign assets held by SAMA were over 1.8 trillion riyals ($480 billion) in January.

As we outlined previously, Riyadh is currently trying to attract upwards of nearly half a trillion dollars in total over the next decade as it seeks to advance MbS' ambitious Vision 2030 agenda of socio-economic reform.

The young leader has articulated that his majority-youthful country has no hope for the future if it doesn’t rapidly transition to a post-oil economy before its world-famous reserves run dry, which is in part why he’s doing everything in his power to court infrastructural, industrial, defense, and technological investments.

However, given the publicity of Pharo's morally conscientious stance in rejecting Saudi state funds  likely a first in history — MbS is in for a continued strained long haul and potentially increased isolation of the Saudi economy.