31 March 2026
Before the outbreak of war in the Middle East, the scale and persistence of capital inflows into Gulf equity markets had been one of the bright spots in the world of finance. More than half of trading activity on the Dubai Financial Market last year involved foreign investors, with institutional investors accounting for more than 70% of trades in a record-breaking year.[1]
Rising participation from sovereign wealth funds, regional family offices and a growing cohort of international asset managers had reinforced the perception that Gulf markets are becoming strategic allocations rather than tactical trades. Since the start of 2024, Dubai had more than doubled the number of hedge fund managers operating in the DIFC, showcasing the region’s growing pull for institutional capital.[2]
Now, the region’s capital markets face their biggest test yet with the onset of conflict in Iran. The UAE even closed its stock markets for two days at the start of March after a weekend of high drama that saw Gulf economies get caught in the crossfire.[3]
For long-term investors, the immediate concern is how best to manage market volatility without undermining strategic exposure. Access to liquidity will be paramount.
Flexibility the first line of defense
In periods of stress, liquidity becomes all too valuable within a portfolio. The ability to hedge, rebalance or raise cash without triggering forced sales can determine whether short-term turbulence contributes to permanent losses within portfolios or affects the long-term fortunes of a company. Geopolitical shocks often create a difficult trade-off: should investors or long-term shareholders raise liquidity by selling core positions at depressed prices, or hold through volatility?
Flexible financing solutions can ease that constraint. Equity-backed financing, for example, can enable investors or company executives to access liquidity against listed holdings, securing necessary funds to weather extended periods of volatility and retaining any upside should prices recover.
Additional liquidity can then be deployed by investors to fund hedging strategies — whether purchasing put options, shorting indices, or building other downside-protection structures — while maintaining long-term exposure to fundamentally strong companies.
Equity-backed financing can also allow investors to cap downside risks by setting an effective floor price for their shares.
Meanwhile, company executives may turn to alternative credit providers when banks rein in lending, raising funds to plug capital shortfalls, support employees or meet any payment obligations.
Deeper markets
A deep and liquid capital markets ecosystem can play an important role in absorbing the latest shock. After all, it was the onset of war in the Middle East in the 1970s that led to the launch of oil futures in 1983, which has enabled smoother functioning of energy markets through successive crises.[4]
Investors can therefore take comfort from the growth of the Gulf equity markets in recent years.
The presence of global hedge funds has helped deepen liquidity across the region, not only in cash equities but also in listed and OTC derivatives, enabling investors to hedge market stress in ways that were previously difficult or too costly. Margin trading facilities on the Tadawul (TASI) in the second quarter of 2025 rose by an impressive 15% over 12 months.[5]
Higher trading volumes and more diverse strategies — including long-short and relative-value approaches — tend to accelerate price adjustment and reduce the risk of prolonged dislocations.[6] This is particularly important for international allocators for whom exit optionality may be as important as upside.
For Middle Eastern economies seeking to diversify away from hydrocarbons, robust capital markets are central to their long-term plans. Ensuring that long-term investors can hedge their positions, stay invested in the market or even exit will be key to ensure their long-term commitment.
With GCC exchanges exceeding $2 trillion in combined market capitalization last year, the capital markets ecosystem has grown by leaps and bounds.[7] It will now face its sternest test yet as investors study ways to protect their portfolios. The ability to raise liquidity without liquidating core holdings, to hedge exposures efficiently, and to ride out volatility without forced deleveraging can materially change outcomes.
Compared with previous decades, long-term shareholders now operate within a more developed ecosystem: deeper liquidity, broader derivatives markets, and growing availability of private credit and structured financing solutions, including equity-backed financing. These tools do not eliminate geopolitical risk, but they materially expand the range of responses available.
Even if geopolitical risk remains beyond investors’ control, maintaining liquidity and avoiding forced selling can be the difference between weathering volatility and being defined by it.
[1] https://ent.news/2026/1/1215.pdf
[2] https://www.fnlondon.com/articles/dubai-doubles-hedge-fund-managers-in-financial-centre-as-top-names-relocate-95132780
[3] https://www.reuters.com/world/middle-east/uae-halts-stock-markets-two-days-after-iran-strikes-2026-03-01/
[4] https://www.cmegroup.com/openmarkets/energy/2023/the-40-year-story-of-a-crude-oil-benchmark.html
[5] https://www.argaam.com/en/article/articledetail/id/1838607
[6] https://oxfordre.com/economics/display/10.1093/acrefore/9780190625979.001.0001/acrefore-9780190625979-e-841
[7] https://www.arabianbusiness.com/markets/golden-era-for-gcc-capital-markets-as-global-investors-cash-in-on-2-3-trillion-powerhouse
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