Dubai Puts $250 Million in Sharia Hedge Fund Platform

Date: Thursday, June 19, 2008
Author: Bill McIntosh, Senior Financial Correspondent, Hedgeworld.com

LONDON (HedgeWorld.com)—The Dubai Multi Commodities Centre Authority, a government agency in the United Arab Emirates, is seeding five sharia-compliant commodity hedge funds run from the United States with a total of $250 million through the Al Safi Trust alternative investment platform backed by Barclays Capital.

The DMCC will invest $50 million in each of the five hedge funds to create a sharia-compliant fund of hedge funds to be marketed under the Dubai Shariah Asset Management brand. Shariah Capital Inc., a U.S.-based advisory firm listed on London's Alternative Investment Market, is the sharia adviser to the Al Safi platform and BarCap is the prime broker and structured products distributor.

"We have worked closely with our international partners to engage world-class fund managers with excellent track records in order to offer investors premium sharia-compliant investment solutions," said Ahmed Bin Sulayem, executive chairman of DMCC, in a statement.

The five commodities hedge funds and their strategies are: Tocqueville Asset Management (gold), Lucas Capital Management LP (energy), Zweig-Dimenna International Managers Inc. (resources), Ospraie Management LLC (agriculture) and BlackRock Inc. (resources and mining).

In an interview, Sheik Yusuf DeLorenzo, chief sharia officer at Shariah Capital, said the demands of Islamic finance mean that Islamic banks need a whole suite of products on both sides of the balance sheet. Islamic banks, for example, can't put money in overnight deposits or buy corporate bonds or government treasuries.

"The Al Safi platform offers a completely new approach for treasurers and private clients of banks and gives investment opportunities not previously accessed by any Islamic institution," he said. "Most importantly all of this is offered to them on a platform that shows compliance with sharia principles and precepts. Obviously not every hedge fund uses a strategy that can be made or declared sharia."

As a turnkey solution, Al Safi provides portfolio screening within a process of due diligence and can only accept those hedge fund strategies and managers that can meet the criteria of its Shariah Supervisory Board. BarCap has developed a newly approved procedure to replicate short selling, while Shariah Capital will issue monthly updates of stocks that participating hedge fund managers can use to ensure compliance.

Shorting uses a classical sharia commercial model known as the Arboon sale. A trader who wants to short a stock in the Al Safi portfolio puts a sell order through BarCap's prime brokerage, which facilitates the transaction as a purchase, not as a loan. This is done without any administrative effect on the hedge fund manager or his portfolio and doesn't affect investment styles since BarCap ensures that the contracts underlying the transactions are sharia-compliant.

"The DMCC's provision of seed capital for five fund managers on Al Safi is a strong affirmation of robustness of the platform's sharia framework and an exciting development in the alternative investments available to Islamic investors," said Richard Ho, head of fund-linked derivatives with BarCap. It is expected that additional long/short equity hedge funds, 130/30 funds as well as specialized investment funds will come to the platform.

"BarCap has expertise in their own structured products department to develop any number of products for financial institutions, while we are lending our expertise on the sharia side to make them sharia-compliant," Sheik DeLorenzo said. "We are hoping this will help alleviate the difficulties in Islamic financial institutions with managing risk and liquidity. These are major problems for the Islamic banks in the world today."

Sharia-compliant products have had limited take-up by investors. Higher costs have been one drawback, while the business delays in undergoing the often circuitous compliance requirements have been another. The Al Safi platform is aiming to do compliance to certify new managers for the platform in a matter of weeks. It also is seeking to deliver products that have comparable returns, fee levels and diversification across asset classes as the funds available to conventional absolute return investors.

"Al Shafi is more than just a platform for a few hedge funds," Sheik DeLorenzo said. "It offers the opportunity to develop a whole range of sharia financial products. The sector is certainly in need of tools for the management of its investments. This will provide many customizable solutions. There is flexibility built into the platform structure."

Such is the interest to tap into demand from Islamic investors that some of the five hedge fund managers unveiled Thursday [June 19] have re-opened closed funds. Funds joining the platform will pay a signup fee plus an ongoing fee for advisory services from the platform operator.

"The Middle East is a fast-growing market, with estimated investment assets of more than $3 trillion," said Dan Rice III, a managing director and portfolio manager for BlackRock, in a statement. "We are looking forward to partnering with the DMCC, creating an attractive platform of investment opportunities for the Islamic investor."

Al Safi is independently controlled and built around the service providers. Law firm Walkers Fund Services Ltd. (Cayman) is the trustee responsible for the overall management of Al Safi, while Citco is the administrator. The Shariah Supervisory Board affirmed the platform as compliant through a fatwa, or religious ruling on Islamic law, issued May 9.

Islamic banks and family offices have invested heavily in property through a wide variety of sharia-compliant real estate investment trusts. They have also invested in commodities, private equity, infrastructure and equity funds. Though this has provided diversification, none of these asset classes has the risk profile of hedge funds. It is also expected that financial institutions and investment firms will develop "white label" investment products to offer Al Safi fund products to their own clients.

Dubai Shariah Asset Management, which is marketing the fund of funds, is 51% owned by Dubai Commodity Asset Management, a wholly owned unit of the state-run DMCC with Shariah Capital holding a 49% stake. Dubai launched the region's first futures exchange, partly owned by DMCC, in 2005 as part of plans to become a center for commodities trading. The exchange offers gold, silver and currency futures contracts and plans to introduce silver options and futures contracts for freight rates and plastics.

BMcIntosh@HedgeWorld.com