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Dubai launches Islamic commodity hedge fund index

Date: Wednesday, January 7, 2009
Author: Reuters UK

The Dubai Multi Commodities Centre Authority (DMCC) governmental agency and asset manager Shariah Capita launched an index tracking the performance of Islamic hedge funds investing in commodities on Wednesday.

The Dubai Shariah Hedge Fund Index is the first to monitor the performance of hedge funds that comply with Islamic law, or sharia, and aims to provide a benchmark for investors, DMCC and Sharia Capital said in a statement.

The index performance will be calculated and reported by Thomson Reuters (TRI.TO).

The index is based on four hedge funds, part of the DSAM Kauthar Commodity Fund and investing in gold, energy, natural resources and mining. Each fund has received start capital of $50 million from the DMCC.

The funds are the constituents of the Sharia compliant Al Safi Trust, which selects sharia-compliant hedge fund managers, and was set up last year by the investment banking division of Barclays Bank (BARC.L) and Sharia Capital.

Sharia forbids strategies typically used by hedge funds, such as short selling, because this involves selling something the investor does not own. Short sellers borrow shares and sell them hoping to buy them back at a lower price.

Al Safi hedge funds operate through so-called arboon contracts sanctioned by a team of Islamic scholars.

Through an arboon, a hedge fund pays a deposit in advance of the transaction and holds an option for a specific length of time to either go through with the purchase of a stock or cancel.

If it goes through with the purchase, the hedge fund pays the rest of the price, but the deposit is retained by the seller, in this case the broker, if the fund walks out. (Reporting by Cecilia Valente, Editing by Dan Lalor)