Shariah Capital sees more Islamic hedge funds taking off

Date: Thursday, March 11, 2010
Author: Reuters

More sharia hedge funds are likely to be launched, specialising in healthcare, telecoms and technology stocks, a U.S. financial firm said, as the industry debates how far Islam sanctions such investments.

Few Islamic hedge funds have successfully gotten off the ground as asset managers struggle to reconcile the religion's ban on excessive speculation with common hedge fund techniques such as short selling.

But with growing demand from new markets, the $1 trillion Islamic finance industry is dabbling in areas that were previously strictly off limits, such as hedge funds and derivatives trading.

U.S.-based Shariah Capital, which has a long-short Islamic commodities hedge fund, said a growing number of fund managers would offer sharia-compliant funds as the religion's rules do not constrain profitability.

"In the future, sharia investors will have the opportunity to enlist high quality managers, operating within sharia guidelines, to generate returns competitive with conventional investors," Sheikh Yusuf Talal DeLorenzo, the firm's chief shariah officer, said in an email reply to questions from Reuters.

Transportation and manufacturing are other possible industries that can accommodate Islamic hedge funds, he said.

Just over $250 million is invested in Shariah Capital's fund, and institutional investors from Saudi Arabia, the Gulf and Malaysia are in talks to participate, DeLorenzo said.

Shariah Capital's hedge fund trades in commodities stocks, such as gold, energy, mining and natural resources firms.

Under the fund, investors buy instead of borrowing securities using the "arbun" method to short the market to comply with the sharia's rule that one must own an asset to sell it.

With arbun a purchaser makes a deposit, which forms part of the purchase price, to buy assets at a later date. If the sale does not proceed, the seller keeps the deposit and gets back the assets.

Shariah Capital's Commodity Fund gained 41 percent last year compared with the Lipper Global Hedge/Long/Short equity which had a one-year return of 31 percent as of Feb 28.

Muddassir Siddiqui, a sharia scholar and Dubai-based lawyer, disagreed that the use of arbun rendered short selling sharia compliant.

"The payment of arbun does not transfer title to the buyer. The principle of the sharia is that you are not allowed to sell something that you don't own," said

"The use of these techniques is sometimes very superficial and synthetic and do not conform to the rules of the sharia."

IIFM, an Islamic finance industry body, with the backing of a derivatives association and banks such as Credit Agricole (CAGR.PA) and Standard Chartered (STAN.L), launched a template over-the-counter Islamic derivative contract this month.

Globally, regulators are tightening supervision of hedge funds in the aftermath of the worst financial crisis in decades.

Recent data indicate that investors still favour hedge funds although the pace of inflows slowed dramatically since late last year.

The industry is now estimated to manage $2.038 trillion, $900 billion below the peak it set in the second quarter of 2008 before the financial crisis hit, Channel Capital Group said.