Institutional Investor's Alpha Magazine - November 2008 - (Page 45)

Strategies Shari’a-Compliant Investing Shari’a B The vast wealth of the Muslim world is beckoning to entrepreneurial bankers, who are creating alternative offerings — hedge funds included — that comply with Islam’s stringent rules on investing. By Kira Nickerson y almost any definition of either “hedge fund” or “Islam,” the two have never been quite compatible. Shari’a, the religious code that guides devout Muslims in all matters, ﬁnancial and otherwise, prohibits certain practices that are generally taken for granted in the West: It explicitly forbids borrowing, for example, a restriction that would seem to preclude leverage and shorting, among the favorite tools of hedge fund managers everywhere. This apparent contradiction hasn’t stopped people from trying to bridge the divide, however. Banks and entrepreneurs are well aware of the staggering wealth controlled by Islamic countries and the vast potential for introducing new investment products. Yet the conﬂict persists. “Hedge funds are among the most controversial areas in Islamic ﬁnance,” says Mohammed Amin, the London-based Islamic ﬁnance leader for accounting ﬁrm PricewaterhouseCoopers, who notes a broad reluctance to invest in something still being debated by Islamic scholars. The relatively few, scattered funds and investment products tailored to Islamic rules on investing are finally beginning to move into the mainstream. Ernst & Young this year released a report on Islamic investing that counted about 500 shari’a-compliant funds of one kind or another at the end of 2007, up from 150 in 2000, and estimated there could be as many as 1,000 by 2010. Shari’a-shaped ﬁscal conservatism has a clear upside, especially in these times. Funds tailored to Islam have had little or no exposure to the West’s subprime-loanriddled, downward-spiraling banks and ﬁnancial stocks. As a consequence a whole range of shari’a hedge funds and mutual funds have outperformed conventional holdings. An Islamic fund index maintained by Morningstar was down 29.34 percent over the 12 months ended November 3, compared with a 34.43 percent drop-off in the Standard & Poor’s 500 index. On the other hand, shari’acompliant investment vehicles are vulnerable to precipitous declines in the prices of oil, natural gas and other commodities. In October, as oil prices plummeted, the index was down 16.75 percent, compared with a 16.79 drop in the S&P 500. The opportunity for shari’a-compliant instruments is potentially enormous. The Islamic investment pool last year was $1.34 trillion, according to Ernst & Young. Understandably, international banks, asset management houses and a host of fund providers are now working feverishly to develop products for this possibly lucrative market. Some critics wonder if shari’a offerings follow fewer standards than they should. At its core a shari’aNOVEMBER 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 45 The Call of

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - November 2008

Institutional Investor's Alpha Magazine - November 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Risk Rewarded The Good Guys: In the Here and Now Interview: Minister of Finance Cover Story: The Agony of Dan Zwirn Strategies: The Early Birds Are Awake Strategies: The Call of Shari’a Profile: Sweet Home Chicago Research Center: What Stampede? Alpha Bytes: Centralize the Data Unhedged: Commentary: Learning from the Wreckage

Institutional Investor's Alpha Magazine - November 2008

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