Institutional Investor's Alpha Magazine - November 2008 - (Page 46)

Shari’a-Compliant Investing compliant investment cannot involve the accrual or collection of interest, and it must invest in tangible assets, such as real estate or equities. Within equities it cannot involve companies that deal in products or practices forbidden by Islamic law — alcohol, gambling, lending or tobacco, for instance. Unlike investors of a generation ago, who had to pick from scant shari’a-compliant offerings, those who now seek such investments have a wide selection of Islamic bonds and mutual funds tied to index-linked portfolios, structured products and hedge funds from which to choose. But because the industry remains nascent, it still seems an open question as to which products actually work and which ones appeal to investors. Hedge funds are at the leading edge of that debate. This summer, Barclays Capital said it would launch the world’s ﬁrst truly shari’a-compliant hedge funds, and Deutsche Bank announced plans to sponsor a shari’a-compliant trading platform. Paris-based Fimat International Banque rolled out a shari’a-compliant platform in 2007, and in May of this year, the Singapore stock exchange introduced an exchange-traded fund for shari’a-minded investors. Some experts, including PricewaterhouseCoopers’ Amin, remain skeptical about the level of interest among investors, let alone the likelihood that a true hedge fund can faithfully adhere to the law of shari’a. But Shaykh Yusuf Talal DeLorenzo, chief shari’a ofﬁcer at New Canaan, Connecticut–based Sharia Capital, sees a boom in the making. “Hedge funds provide Islamic banks and financial create fund-linked derivatives that are acceptable within some interpretations of shari’a. Barclays and Al Saﬁ are using a classic Islamic-ﬁnance structure known as an arboon, which sets up a derivatives contract to distance investors from short-selling. Dubai-based Saqib Masood, head of Islamic-product development at London’s HSBC Saudi Arabia, says the modern Islamic ﬁnance industry is still developing, with signiﬁcant growth seen only in the past ﬁve or six years, and that it remains in an experimental stage. But he notes that interest in shari’a-compliant funds has grown from about one third of retail investors in Saudi Arabia to about two thirds. “Critical mass is coming through,” Masood says, explaining that demand for modern shari’a-compliant offerings comes predominantly from high-net-worth individuals. Richard Ho, head of derivatives at Barclays Capital, says investors in the Islamic Middle East and Far East are eager to use alternatives, but they are held back in part by tradition and in part by the dearth of offerings that are promoted as being at least shari’a-sensitive, if not fully compliant. Masood adds that he expects the demand for attractive, international shari’a-compliant product offerings to ﬁlter soon into the institutional market in Islamic countries, as awareness of such products grows. And he says big pension funds in particular will begin to demand them. Already Islamic insurance companies — which are structured to reﬂect the concept of takaful, a broad Islamic notion of the common good — can invest only in shari’a products, and pension funds will likely be pressured by their members to abide by shari’a. Sovereign wealth funds, the biggest institutional investors in the Middle East, Masood says, seem content, for the time being, to take stakes in noncompliant investments, mainly because so few alternatives exist. He doubts, however, that they will ever sign on full-bore to shari’a compliance since performance is paramount for most sovereign wealth funds; shari’a is a secondary, complicating consideration. Estimates of the number of shari’a-tailored funds vary. Failaka Islamic Funds, a Chicago-based database on shari’a-compliant funds, counts 325 Islam-sensitive mutual funds alone. Kuwait-based Sabaek Leasing and Investment Co. projects that a universe of 700 such funds will exist before the end of this year and more than 950 by 2010, driven in part by strong ﬁnancial liquidity in the oil-producing countries of the Persian Gulf and by the growing awareness of, and preference for, sophisticated shari’a-compliant products. Hedge funds that are shari’a-compliant are much less common, numbering perhaps no more than a dozen. The essential problem is most likely a chicken-and-egg dilemma: Which comes ﬁrst, the supply or the demand? A number of banks and ﬁrms are pushing the supply side, and Masood says they can be categorized roughly into three groups. First are those focused on alternatives — like Al Saﬁ. Launched in June, Al Saﬁ offers ﬁve New York– “Hedge funds provide Islamic banks and financial institutions with a number of advantages they lack.” — SHAYKH YUSUF TALAL DELORENZO, SHARIA CAPITAL institutions with a number of advantages they currently lack,” notes DeLorenzo, whose ﬁrm launched Al Saﬁ, a shari’a-compliant platform, with Barclays. DeLorenzo argues that the urge to diversify and better manage risk will inevitably drive such customers to hedge funds. The push from outside the Muslim world seems to be growing. In response some banks and entrepreneurs are striving hard to hit the right notes. Al Saﬁ, for instance, has what it calls a shari’a supervisory board — a feature common to shari’a-sensitive funds — that screens holdings to ensure that they are shari’acompliant and that offerings are not just palatable but also appealing to Islamic investors. Part of the attraction for Barclays is that — assuming enough shari’a-compliant hedge funds are created — it will eventually be able to 46 • INSTITUTIONAL INVESTOR’S ALPHA • NOVEMBER 2008

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

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.