Access to Islamic Hedge Funds - Incisive Media

November 2008 l Access to Islamic Hedge Funds Supplement 

The voice of the alternative investment industry 

In association with 

Access to Islamic 

Hedge Funds 

Challenges to setting up 

Running a Shariah compliant hedge 

fund presents some 

challenges. The Al 

Safi platform may 

have the solution. 

6 

dmcc 

Dubai Multi Commodities Centre is seeding 

five funds on the Al 

Safi platform, putting 

its seal of approval 

on the project. 

13 

access to al safi 

Islamic investors are eager to access 

Shariah compliant 

hedge funds and 

fund managers are 

keen not to sacrifice 

strategy and 

15 return. 

fund profiles 

Three hedge funds are operating from 

the Al Safi platform. 

A wide range of 

long/short funds 

are hoping to join 

them in the 

18 near future.

access to islamic hedge funds 

Contents 

Editor 

Margie Lindsay 

+44 (0)20 7484 9889 

margie.lindsay@incisivemedia.com 

US Editor 

Kris Devasabai 

+44 (0)20 7484 9748 

kris.devasabai@incisivemedia.com 

Production 

Amanda Allen 

Publisher 

Jonathan Greene 

+44 (0)20 7484 9867 

jonathan.greene@incisivemedia.com 

Advertising 

Luther Rahman 

+44 (0)20 7968 4514 

luther.rahman@incisivemedia.com 

Advertising production 

Melanie Law 

+44 (0)20 7316 9837 

melanie.law@incisivemedia.com 

Advertising/editorial fax 

+44 (0)20 7930 2238 

Managing Director 

Matthew Crabbe 

+44 (0)20 7484 9814 

matthew.crabbe@incisivemedia.com 

Marketing manager 

+44 (0)20 7484 9953 

claudia.barber@incisivemedia.com 

Head office 

Haymarket House, 

28–29 Haymarket 

London SW1Y 4RX 

Subscription and 

circulation enquiries 

+44 (0)20 7484 9890 

Subscription renewals 

+44 (0)20 7484 9896 

All reports written by 

Margie Lindsay 

Information on hedge fund managers 

in Hedge Funds Review is based 

solely on information supplied by 

those managers. The accuracy has 

not been verified by Hedge Funds 

Review. We take no responsibility for 

it. No information in this magazine 

should be taken as a solicitation 

for investment in any of the 

investments reported on. 

© 2008 Incisive Media Group 

4–5 Introduction to Shariah 

The tremendous growth of Islamic finance has generated innovative investment products. As the 

Islamic marketplace grows in sophistication, investors are beginning to expect more than the 

traditional returns offered by real estate and commodity funds. Hedge funds could be the answer. 

6–7 Challenges to setting up 

Running a Shariah hedge fund is a daunting task. Many issues, particularly ensuring the underlying 

stocks traded are all compliant, has scuppered attempts in the past. The Al Safi platform thinks it may 

have the answers that will be able to provide ethical Islamic investors with an acceptable product. 

8–9 Al Safi Trust Platform 

Scepticism among some Islamic scholars about how to make hedge funds mainstream in the Islamic 

investment community has challenged attempts to set up Shariah compliant funds. The question now 

is whether the Al Safi Trust Platform has addressed those concerns and found a workable solution. 

10–12 Success of Al Safi 

Islamic scholars have long disagreed about the merits of hedge fund investments. Nevertheless 

ethical Islamic investors are keen to tap into the high returns offered by hedge funds. One of 

the main stumbling blocks has been shorting. The short arboon sale may be an acceptable 

alternative to both scholars and investors. 

13–14 DMCC profile 

A strategic initiative of the Dubai government created the Dubai Multi Commodities Centre. Now 

DMCC is playing an active role in seeding the first five hedge funds on the Al Safi Trust Platform. 

15 Access to Al Safi for investors 

There is growing demand in the Middle East for access to Shariah compliant alternative 

investments like hedge funds. 

16 Access to Al Safi for hedge funds 

Hedge fund managers are keen to tap into Middle Eastern investors, particularly as sources of new cash 

is squeezed by the financial downturn. Putting a fund on the Al Safi platform could be a solution. 

17 Why hedge funds? 

While hedge funds were originally attractive only to high net worth individuals and family offices, 

institutional investors are now eager to take advantage of the higher returns largely uncorrelated 

to markets offered by these alternative investments. 

18–19 Fund profile: DSAM Kauthar Gold Fund (Tocqueville Asset 

Management 

20–21 Fund profile: DSAM Kauthar Energy Fund (Lucas Capital Management) 

22–23 Fund profile: DSAM Kauthar Natural Resources Fund (Zweig-DiMenna 

International Managers) 

24–25 Fund profile: Peconic Partners 

26–27 Strategy profile: EnTrust Capital 

28–29 Fund profile: Van Eck Hard Assets 2x Fund (Van Eck Global) 

30–32 Fund profile: Caduceus Capital (OrbiMed Advisers) 

33–34 Strategy profile: Alkeon Capital Management 

35 Contact details for the Al Safi Trust Platform 

Cover picture: Alhambra, the palace and fortress complex of the Moorish monarchs of Granada in southern Spain, is a 

reflection of the culture of the last days of the Nasrid emirate of Granada. It is a place where artists and intellectuals took 

refuge. Alhambra mixes natural elements with manmade ones and is a testament to the skill of Muslim craftsmen of that 

time. The literal translation, ‘red fortress’, derives from the colour of the red clay of the surroundings of which the fort is made. 

www.hedgefundsreview.com 

November 2008 | Access to Islamic Hedge Funds Supplement |

introduction to shariah 

Islamic investors eager to access 

Shariah compliant hedge funds 

The tremendous growth of Islamic finance has generated innovative investment 

products. As the Islamic marketplace grows in sophistication, investors are 

beginning to expect more than the traditional returns offered by real estate and 

commodity funds. Hedge funds could be the answer. 

Demand for Islamic financial 

instruments is expected to increase 

rapidly with some estimating that 

20% annual growth would not be 

unexceptional. Although some have 

questioned whether a Shariah compliant 

hedge fund was possible, one 

workable solution may have been 

found. 

Shariah funds and Shariah compliant 

investment are of increasing 

interest to both global Islamic investors 

and developed western financiers 

keen to create products that 

will attract the significant sums 

available from sovereign wealth 

funds and high net worth individuals 

in the Middle East and other 

Islamic countries. 

The problem facing the introduction 

of these products and particularly 

hedge funds has been how to 

find a workable solution acceptable 

to both Shariah scholars and to the 

investment vehicles. 

Some attempts have been made 

to find Shariah compliant solutions 

for hedge funds but up to now, no 

one has succeeded. Shariah Capital, 

working with Barclays Capital and 

the Dubai government in the form 

of the Dubai Multi Commodities 

Centre and its affiliates, believes it 

has found a solution. 

One of the reasons few have 

tried to find a hedge fund solution 

is the development costs (and time) 

involved. The hedge fund solution 

goes beyond the usual development 

of a financial product because it is 

not enough just to structure a fund 

to be Shariah compliant. It is also 

necessary to ensure compliance of 

the hedging strategy, the securities 

held in the investment portfolio and 

workable legal solutions with the 

prime broker and eventually the fund 

administrator. The hedge fund solution 

requires fundamental changes 

to the way trades are processed, specifically 

the contracts underlying the 

exchange of securities must comply 

with Shariah rules. 

Eric Meyer, president, CEO and 

executive chairman of Shariah 

Capital, is one of the industry’s 

most vocal and active champions 

of Shariah compliant solutions. His 

company specialises in customising 

Shariah compliant financial 

| Access to Islamic Hedge Funds Supplement | November 2008 

www.hedgefundsreview.com

introduction to shariah 

products and platforms as well as 

consulting and advisory services 

to global financial institutions and 

investment companies keen to find 

ways to become Shariah compliant. 

Together with its majority joint 

venture partner, Dubai Commodities 

Asset Management (51%), Shariah 

Capital has set up Dubai Shariah 

Asset Management (DSAM). This 

partnership is responsible for five 

funds which are receiving seed capital 

of $50 million from DMCC. 

Meyer is dismissive of the naysayers. 

He says the ‘first’ of anything 

is always the most difficult. 

He points to the introduction of 

the sukuk market, which began in 

Malaysia in 1990 with the small 

issuance of RM120 million ($30 million) 

by Shell Malaysia and has progressed. 

The largest issuance size to 

date is RM10 billion ($2.7 billion) by 

Rantau Abang Capital Berhad. The 

sukuk market more than doubled in 

2007 to exceed $60 billion compared 

with less than $500 million in 2001. 

He believes there is tremendous 

demand for Shariah compliant 

hedge funds. Shaykh Yusuf Talal 

DeLorenzo, chief Shariah officer and 

board member at Shariah Capital and 

also on the Al Safi Shariah board of 

scholars, thinks there is always some 

resistance to new products. 

“There are few alternatives to Al 

Safi. It is the first platform of its 

kind available to Islamic investors 

in the Middle East and elsewhere. It 

is the most comprehensive and the 

biggest. Up to the time of its launch 

there were a lot of sceptics,” he says. 

Shaykh Yusuf believes there will 

be a steep learning curve both for 

Islamic investors and on the hedge 

making sense of shariah finance terms 

fund side before the concept will 

be fully understood or embraced. 

He and Meyer are adamant that 

the Shariah board, which oversees 

compliance, is not cutting corners 

or finding trick solutions for complicated 

problems. On the contrary, 

Shaykh Yusuf points to the presence 

on the board (article, page 9) 

of members from the Auditing and 

Accounting Organization of Islamic 

Financial Institutions (AAOIFI), 

which is working to establish 

Islamic finance standards. 

“The Shariah board is now a fairly 

well-established process and people 

are familiar with how it works 

and the processes it goes through. 

Around 10 years ago AAOIFI was 

established as the standard-setting 

body for the industry. All the Al Safi 

Shariah board are also members of 

the AAOIFI board. So you will find 

the broadest possible consensus in 

putting products together,” comments 

Shaykh Yusuf. 

He believes scholars need to find 

consensus answers and that process 

does not compromise Islamic principles. 

“We have 70%–80% industry 

acceptance for what we are offering. 

Shariah compliant hedge fund solutions 

have been tried for four or five 

years. A couple have launched. So 

it’s not a completely new subject,” 

admits Shaykh Yusuf. 

Meyer agrees that the compliance 

issue will be a big talking point for 

some time. However, he believes 

the quality of the Shariah board for 

the Al Safi platform is outstanding. 

“We have done our homework. 

We’ve done this the right way. We’ve 

been very methodical, with a good 

group of Shariah scholars who are 

Murabaha is a Shariah-compliant sale where the seller expressly mentions 

the cost he has incurred on the commodities to be sold and sells it to another 

person by adding some profit or mark-up which is known to the buyer. For 

example, instead of a bank lending money to a customer who wants to buy 

a commodity, the bank buys the commodity and sells it to the customer 

for a declared marked-up sum. That way the bank makes money on the 

transaction without it being through interest. 

Sukuk means a financial certificate in Arabic. A sukuk is a security based 

on the securitisation of performing assets that resembles a bond, complying 

with Islamic law prohibiting the charging or paying of interest. 

Sukuk al salam is a form of sukuk based on a salam contract for the 

delivery of fungible assets. 

Arboon is a Shariah form of sale contract in which seller and buyer effect a 

contract in which a portion of the price is paid in earnest money. The buyer 

then has the right to complete the sale within a specified period of time or to 

cancel the contract and forfeit the down payment. 

Source: Shariah Capital. 

competent legal experts and they 

have found a solution that is watertight. 

Clearly, this could become the 

standard for the funds industry in 

future years,” comments Meyer. 

Initially the platform will only 

be accepting hedge funds that 

use a long/short strategy. This is 

what Meyer describes as the “plain 

vanilla”, basic strategy that is the 

least difficult to adapt to Shariah 

rules. Certain sectors are also relatively 

easy to pass through the Shariah 

screen. For example, healthcare, 

technology, commodities and energy 

tend to be areas most compatible 

with Shariah law. “We’re selling into 

a new market so we wanted to keep 

things as specific as we could. If we 

start only with equity long/short, 

that’s fine. We’ll move into technicolour 

later. We need to start with 

the basics first,” explains Meyer. 

“To begin we started working with 

Barclays prime brokers in New York 

with a set of regulations and the 

SEC [US Securities and Exchange 

islamic financing matures 

Commission] regulations. This was 

a very lengthy and complicated 

process. We first wanted to see it 

work with the funds we have on the 

platform,” Shaykh Yusuf says. 

Despite the significant challenges 

faced to get the platform up 

and running, the first funds using 

the platform seem pleased with the 

system and there have so far been 

no problems. Capacity on the platform 

is large and Meyer for one does 

not think there will be any problems 

adding funds once the significant 

amount of due diligence and paperwork 

is finished. 

As the learning curve goes up for 

Islamic investors, Meyer expects 

to see demand for the funds on the 

platform increase. Judging from 

the feedback Meyer and others are 

receiving from roadshows around 

the region detailing Al Safi, Meyer 

is confident investors will embrace 

the concept and have confidence in 

the rigorous application of Shariah 

laws to its operation. n 

The term ‘Islamic economics’ first appeared in the 1950s and 1960s as 

research papers, articles and books began to discuss the subject. By the 

1970s the first Islamic banks and finance houses were opening in the Middle 

East and North Africa (known as the MENA region). Their growth was 

largely boosted by oil revenues. It was at this point that the first attempts 

at managing liquidity through commodity murabaha first appeared. Also in 

1971 Dubai Islamic Bank opened for business. 

In the 1980s the numbers of Islamic banks and finance houses blossomed 

to over 40. Banks at the time put capital into real estate for the long term 

and murabaha commodities for the short term. 

By the 1990s international banks like Citi and HSBC began offering Shariahcompliant 

products. The first industry standards were established by the 

Accounting and Auditing Organization for Islamic Financial Institutions. During 

this decade Bahrain and Malaysia emerged as hubs for Islamic finance. 

In 1994 the first conventional asset managers were invited to manage 

investments under Shariah supervision and Islamic investing itself expanded 

to include leasing funds and a few long-only equity funds. By 1999 Dow Jones 

had launched its Islamic market indices. By the beginning of the next century 

and millennium, the number of mutual funds had increased to over 60 and the 

number of Islamic banks operating around the world numbered more than 200. 

In 2000 some of the major international law firms established Islamic 

finance practices and began to compete for market share. In 2001 the 

first Shariah-compliant structured products were introduced in the form of 

principal protected funds and notes. Real estate and leasing funds grew and 

the first infrastructure projects were financed under Shariah law. 

The first sukuk was issued in 2002 by the Malaysia government. Since then 

the value of these issues has doubled. The following year the first corporate 

sukuk were issued and the ratings agencies began rating sukuk. In 2006 the 

first sukuk with US-based corporate assets was issued. 

Shariah-compliant real estate investment trusts (REITs) and exchangetraded 

funds (ETFs) were introduced in 2007. In the UK the treasury 

announced it intended to issue sukuks and the London Metal Exchange 

(LME) reported that $100 billion in Islamic assets were invested. 

By 2008 Shariah-compliant hedge funds were on the scene and several 

initiatives were launched to try to increase their numbers and investment 

flows into them. 

Source: Shariah Capital. 



challenges to setting up al safi 

Shariah poses challenges to 

hedge fund managers 

Running a Shariah hedge fund is a daunting task. A number of issues, not 

least of which is ensuring the underlying stocks traded are all compliant, has 

scuppered attempts to create a solution acceptable for both hedge funds and 

ethical Islamic investors. The Al Safi platform thinks it may have the answers. 

Although the demand for Shariah 

compliant products is growing, 

hedge funds have been one of the 

last alternative investment vehicles 

to attempt the daunting task of being 

Shariah compliant. An impressive 

and combined effort of a number of 

companies and factors has produced 

what Barclays Capital hopes will be 

the blueprint for future Shariah compliant 

hedge fund platforms. 

It is not only hedge funds that 

need to be convinced that the efforts 

at finding a way to comply with Shariah 

law are worthwhile. Bankers, 

investors and many in the media have 

questioned whether it would ever be 

possible to find a way to make hedge 

funds Shariah compliant. Although 

there are still plenty of sceptics, the 

Al Safi Trust Platform seems to have 

raised the bar on standards, introducing 

a relatively fast and easy way 

of ensuring compliance while at the 

same time allowing funds to continue 

to pursue the strategies that create 

alpha. 

Some investors, unaware of the 

variety of strategies available to 

managers, expect all hedge funds to 

be extremely speculative and therefore 

at odds with the Shariah prohibition 

of undue speculation. Others 

think only of short sales and conclude 

hedge funds must be prohibited 

by Islamic law. 

Despite the solution the Al Safi 

platform presents, it may take some 

time before investors are comfortable, 

and trusting, enough for this 

to translate into demand for Shariah 

compliant funds. 

One of the reasons it has been so 

difficult to come up with a workable 

solution is simply the development 

costs. A solution for hedge funds 

goes beyond the usual development 

costs (and time) needed for a financial 

product. It is not enough just to 

structure a fund. It is also necessary 

to ensure compliance of the hedging 

strategy and the securities held in the 

investment portfolio. 

The hedge fund solution also 

needs some fundamental changes 

to the way trades are processed. In 

particular the contracts that underlie 

the exchange of securities need to 

comply with Shariah rules. 

These transactions are the preserve 

of the prime broker. The role 

of the prime broker, as well as all the 

regulatory requirements coupled with 

Shariah rules, has daunted many. 

To find a solution, a prime broker 

needs lawyers, internal and external 

counsel, and more than one set of 

each, to work with Shariah experts, 

traders and investment managers to 

ensure that every step of the process 

is feasible, compliant and, ultimately, 

profitable. 

This costs. Few financial institutions 

are willing to take the time and 

spend the money needed to find a 

workable and sustainable solution. 

Barclays Capital, as prime broker, 

has made the financial commitment 

and seen the potential rewards of 

stealing a march on competitors 

also eager to offer Shariah compliant 

hedge funds and related products to 

eager investors. 

In theory at least there should be 

nothing controversial about the way 

the Al Safi Trust Platform operates 

or invests. The Shariah supervisory 

board insists every aspect of the platform’s 

(and individual hedge funds’) 

operations are unambiguously compliant 

and transparent. The board 

also uses contractual norms established 

by the classical jurists of 

Islam. 

The result is a bit of a paradox: an 

innovative new hedge fund platform 



challenges to setting up al safi 

(Al Safi) based on Islam’s ancient 

laws using ‘old’ tools to make it work. 

Short arboon 

The platform and fund managers 

do not sell what they do not own. 

By using a prescribed methodology 

developed and certified by the Shariah 

supervisory board, hedge funds 

implement a Shariah compliant short 

sale equivalent, known as the short 

arboon sale. This alternative method, 

which replicates the economic results 

of a short sale without using the 

borrow-and-sell method of shorting, 

needed two steps to be possible. 

First was the creation and certification 

by means of a fatwa of a 

Shariah compliant short sale methodology. 

The second was the modification 

of prime broker documentation 

to replace conventional short sale 

methods with the approved, Shariah 

compliant short sale arboon (article, 

page 12). 

The platform also uses an alternative 

set of prime brokerage documentation 

for all trades, whether long or 

short. This ensures every trade is 

done under Shariah rules: no interest, 

no prohibited terms and conditions 

and no prohibited operations (like 

the purchase or sale of prohibited 

businesses such as pork or alcohol 

production, banks and insurance 

companies). 

All managers on the platform are 

contractually obligated to execute 

short sales through Barclays Capital 

prime brokerage. Managers can 

initiate long-only trades with other 

brokers, but they need to be settled at 

Barclays. 

Shariah compliant contracts allow 

Barclays Capital Prime Brokerage 

to process trades initiated by hedge 

fund managers, avoiding all the prohibited 

elements present in prime 

brokerage contracts commonly 

used for conventional hedge funds. 

Another problem the Shariah supervisory 

board has to deal with is how a 

manager can temporarily ‘cash out’ of 

a position. The money has to be held 

in a non-interest bearing account or, if 

the term is longer than say, overnight, 

the cash needs to be invested in a Shariah 

compliant, short-term instrument 

like a murabahah. 

Purification 

One potential glitch is what to do 

when a fund accidentally trades an 

unacceptable stock. While all companies 

are screened for unacceptable 

primary business activities, a manager 

may not realise a stock being 

traded is not on the list until after 

the trade is made. When the Shariah 

monitoring processes discovers a 

profit was made from a non-Shariah 

compliant stock, a few remedial steps 

can be taken. 

First, the company will be ‘screened 

out’ and declared unacceptable for 

Shariah compliant investments for 

the future. If ‘impure’ revenues from 

the transactions are less than 5%, 

the stock can be held, but investors 

will be responsible for ‘purifying’ the 

investment. This is done by giving 

an equal proportion of the earnings 

to charities chosen by the fund. 

Different Shariah supervisory 

boards have different ways of dealing 

with purification. The Al Safi Trust 

Shariah supervisory board takes a 

practical approach. It offers different 

solutions for different managers. The 

board studies the strategy and sector 

concentration(s) of each fund on the 

platform. If it finds the fund invests 

exclusively in a particular sector in 

which there is almost never any need 

for purification, such as healthcare, 

technology or telecommunications, 

then the Shariah board will recommend 

there is no need for purification 

from that fund other than in a special 

situation, like when a trade in a non- 

Shariah compliant stock is made. 

If the fund invests in sectors in 

which purification often arises – for 

example, retail outlets or REITs – or 

if it invests in a variety of sectors, 

the board will recommend a flat purification 

rate of, say, 1.5% be applied 

to the investor’s net earnings. 

If a fund holds stocks that have 

especially high revenues from unacceptable 

activities (still less than 5%), 

the board has the right to recommend 

a higher purification rate. 

If a manager or a trader inadvertently 

purchases an unacceptable 

stock, the board will deliberate and 

could recommend an appropriate 

amount to be purified from the fund’s 

profits resulting from the oversight. 

Investors will be told about all recommendations 

made by the board on 

purification through the Al Safi Trust 

administrator. 

The Al Safi Trust and hedge fund 

managers are not responsible for 

portfolio purification. Investors are. 

This way investors can donate purification 

money to the charities of their 

choice. Although the platform will 

recommend how much should go to 

charity, investors make the final allocations 

themselves. 

Dealing with cash and purification 

Clear investment guidelines have 

been given to all the hedge fund managers 

on the platform on how to deal 

with cash. Cash is never to be deposited 

in interest-earning accounts or 

instruments. If a manager needed to 

“cash out” temporarily a position, the 

money will be held in a non-interest 

bearing account or, if the term is 

likely to be longer, invested in a Shariah 

compliant, short-term instrument 

like a murabahah. 

Another area hedge funds may 

find unusual is the purification 

process. Although all the company 

stocks traded are screened for unacceptable 

primary business activities, 

there are some companies with 

acceptable primary businesses, like 

the manufacture of spare parts for 

cars for example, that might own or 

engage in unacceptable businesses, 

like the sale of alcohol at company 

canteens or restaurants they own 

and operate at their factories. 

When the Shariah monitoring 

processes show that revenues from 

an unacceptable source exceed 5% 

of total revenue, then the company 

will be screened out and declared 

unacceptable for Shariah compliant 

investments. 

But if the ‘impure’ revenues are 

less than 5%, the stock may be held. 

Investors will be responsible for 

purifying the investment by giving a 

commensurate portion of fund earnings 

to charities of their choice. 

While different Shariah supervisory 

boards have different ways of dealing 

with purification, the Al Safi Trust 

Shariah supervisory board takes a 

practical approach, offering different 

solutions for different managers. 

Stock dividends is another area 

where there are special rules. While 

many Shariah compliant funds calculate 

purification liabilities and then 

pay the them from dividends, this is 

not the practice of the Al Safi Trust 

or its sub-trust managers. There are 

three main reasons. Not all stocks 

pay dividends. Hedge fund managers 

are active traders of stocks and many 

only occasionally hold stocks long 

enough to collect dividends. Finally, 

the Al Safi Trust Platform funds 

have already been given a purification 

formula by the Shariah supervisory 

board. So investors should not 

be troubled by dividends and complex 

purification formulas. n 

estimated growth of assets/net asset flow 

equity hedge (total) 1990–Q2 2008 

Number of funds 

8,000 

7,000 

6,000 

5,000 

4,000 

3,000 

2,000 

1,000 

0 

80 530 

127 694 

168 937 

Hedge funds 

Fund of funds 

237 1,277 

291 1,654 

377 2,006 

426 2,564 

389 2,392 

477 

2,848 

515 

3,102 

538 

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Q1 Q2 

08 08 

Source: Hedge Fund Research 

3,335 

550 

3,904 

781 

4,598 

1,232 

5,065 

5,782 

6,665 

7,241 

7,634 

1,654 

1,996 

2,462 

2,462 

2,572 

7,601 

2,642 

7,591 

fatwa approvals 

Short sale equivalent structure 

Fatwa relating to arboon structure to effect short sales of securities and long 

sales and purchases of securities’ 

Dated 12 Rabi’al Awwal 1426 AH (short sale equivalent fatwa) 

Option equivalent structure 

Fatwa relating to arboon structure to effect options trading 

Dated 12 Rabi’al Awwal 1426 AH (options equivalent fatwa) 

Platform solution 

Fatwa relating to Shariah governed equity trading software which will be 

used by Shariah Capital 

Dated 12 Rabi’al Awwal 1426 AH 

Fatwa relating to financial screen for Shariah compliance 

Dated 9 Rajab 1424 AH (Shariah screens fatwa) 



al safi trust platform 

Innovative one-stop solution could 

lead way for Shariah compliant funds 

There is a lot of scepticism among Islamic scholars about how to make hedge 

funds mainstream in the Islamic investment community. One of their major 

concerns is that hedge funds are perceived as trading in risk to obtain returns 

through speculation, which is forbidden under Shariah law. 

search for islamic 

financing standards 

The Islamic finance industry is 

rapidly growing and evolving. While 

there are still many outstanding 

issues – and no doubt there will 

continue to be as the industry 

evolves – standards are important. 

They give shape to the market 

and help define the characteristics 

of the industry as well as 

providing the basis for continuing 

development, according to Dr 

Mohamad Nedal Alchaar, secretary 

general of the Accounting and 

Auditing Organization for Islamic 

Financial Institutions (AAOIFI). 

AAOIFI is an Islamic international, 

autonomous, non-for-profit 

corporate body that prepares 

accounting, auditing, governance, 

ethics and Shariah standards 

for Islamic financial institutions 

and the industry. Professional 

qualification programmes are 

supported by the organisation. 

These include the Certified Islamic 

Public Accountant (CIPA), the 

Shariah advisor and auditor (CSAA) 

and the corporate compliance 

programmes. The organisation is 

supported by 155 members from 

40 countries, including central 

banks, Islamic financial institutions 

and other participants from the 

international Islamic banking and 

finance industry. 

AAOIFI has gained support 

for the implementation of its 

standards. These are now adopted 

in Bahrain, the Dubai International 

Financial Centre, Jordan, Lebanon, 

Qatar, Sudan and Syria. The relevant 

authorities in Australia, Indonesia, 

Malaysia, Pakistan, Saudi Arabia 

and South Africa have issued 

guidelines based on AAOIFI’s 

standards and pronouncements. 

100 

% 

80 

60 

40 

20 

0 

Source: Global Insight, Ernst & Young Analysis 

Al Safi is an independent, Cayman 

Islands-based alterative investment 

platform designed specifically for 

Shariah compliant hedge fund strategies. 

Initially the platform will offer 

commodity and long/short equity 

hedge fund investment strategies to 

investors. 

The platform provides what 

Barclays Capital calls a one-stop 

solution for investment managers 

and investors. All of the prime brokerage, 

administration and Shariah 

compliance functions are provided 

on the platform in a turnkey solution. 

One of the main issues the platform 

deals with is the short selling, 

which is the bread and butter of 

hedge funds. Perhaps the trickiest 

of the Shariah compliance issues, 

the platform has developed not just 

a solution to shorting but also a way 

to ensure the stocks traded by all the 

hedge funds are Shariah compliant. 

Dubai Shariah Asset Management 

(DSAM) brands and distributes a 

fund of funds product featuring the 

long/short equity commodity hedge 

fund managers on Al Safi. Through 

this fund of funds, DSAM offers 

Islamic investors a commoditiesbased 

Shariah compliant investment 

product that goes beyond anything 

previously experienced in the 

Islamic market. 

For the first time Islamic investors 

have access to sophisticated trading 

strategies, world-class managers 

and a completely new avenue for 

commodity investment. 

To ensure compliance, each manager 

is subject to oversight and 

regular audits by a panel of Shariah 

scholars and all securities are prescreened 

for Shariah compliance. 

Shorting is accomplished through 

a methodology based on a classic 

transaction known as an arboon 

and by a set of exclusive prime brokerage 

agreements that enable an 

arboon sale rather than a borrowing 

of securities. This replicates the economics 

of a conventional short sale 

(article, page 12). 

All managers on the Al Safi Trust 

Platform are contractually obligated 

to buy and sell stocks exclusively 

through Barclays Capital Prime 

Brokerage. The Arboon short sale 

equivalent allows Barclays Capital 

to process trades by the platform’s 

hedge fund managers in a Shariah 

compliant manner that avoids all 

target asset classes of issued islamic funds 

9 

14 

45 

5 

27 

2002 

10 

12 

20 

10 

9 

40 

2006 

the prohibited elements – interest, 

prohibited terms, prohibited transactions, 

prohibited fees – that are 

present in prime brokerage contracts 

used for conventional hedge funds. 

Through a refined Shariah 

screening process using proprietary 

metrics and software, managers on 

the Al Safi Trust Platform choose 

only from a universe of Shariah 

compliant stocks. 

Every fund on the Al Safi Trust 

Platform is subject to the same 

contractual obligation to invest 

according to the guidelines established 

by the Shariah supervisory 

board and subject to Shariah oversight 

and auditing. 

The Al Safi Trust itself is subject 

to oversight by a panel of Shariah 

scholars. These scholars oversee all 

investments made by the hedge fund 

managers. 

The Shariah supervisory board 

has reviewed the structure and the 

operations of the Al Safi Trust and 

has certified with a fatwa that these 

comply with Shariah. 

The Shariah supervisory board 

has also published investment 

guidelines for each hedge fund 

manager and has appointed an 

Other 

Private equity and 

real estate 

Money market and 

commodities 

Balanced 

Fixed income 

Equity 



al safi trust platform 

executive representative to monitor 

on a full-time basis the trades and 

operations of the platform and each 

fund manager. 

Through daily exception reports 

prepared by Barclays Capital, purchases 

of any stocks not on the 

approved list can be reversed before 

these are cleared for inclusion in a 

manager’s portfolio. 

Selecting Shariah compliant stocks 

The stock selection needs to be 

automated but robust. The Shariah 

screening process uses proprietary 

metrics and software so fund 

managers are able to choose from 

an expansive universe of stocks. 

The enhanced screening criteria is 

stricter from a Shariah standpoint 

than the present screening criteria 

used by well-known Islamic indices. 

AD 

Nevertheless, it allows managers to 

choose from a large universe and 

can be added to. 

The screening process is designed 

to weed out “unacceptable” companies. 

It has been designed to accommodate 

screening criteria developed 

by Shariah boards before electronic 

reporting and before the EDGAR 

database (electronic data gathering, 

analysis and retrieval of SEC filings) 

established by the US Securities 

and Exchange Commission in 

the late 1990s. 

Shariah boards that have approved 

and supervise the Dow Jones Islamic 

Market Indexes, the FTSE Islamic 

Indexes, the MSCI Barra Islamic 

Indexes, the Standard & Poor’s 

Islamic Indexes, and others, believe 

the screening criteria developed for 

the Al Safi Trust are superior to all 

others. This is because the screening 

method used by the indices often 

throws out good companies as well 

as bad. The board thinks it is only 

a matter of time before the Al Safi 

Trust criteria are adopted as the 

industry standard. 

The refined screens developed for 

Al Safi hedge funds focus directly 

on what is prohibited. Other 

screens focused indirectly on these 

elements. The well-known screens 

begin by considering a company’s 

primary business and then by scrutinising 

its financials. 

The first of the financial items to 

be considered is usually corporate 

debt. This indicates interest and the 

more debt, the more interest paid. 

Islamic indices measure corporate 

debt in two ways. One divides 

total assets by total debt. The other 

divides market capitalisation by 

total debt. 

According to the Shariah supervisory 

boards of these indices, if 

the ratio of debt/assets or the ratio 

of market capitalisation/assets is 

less than 33%, the stock will pass 

through the screens. If it is greater, 

the stock will be screened out and 

declared unacceptable for Shariah 

compliant investments. 

The refined screens used for Al 

Safi do not focus on debt. They 

focus directly on what is prohibited: 

interest. Debt is not prohibited by 

Shariah rules. What is prohibited is 

the by-product of modern, conventional 

debt, which is interest. 

This results in a more refined 

screen that is more exacting for 

companies to pass. Using advanced 

software and data feeds, fund managers 

on the platform have access 

to 45,000 stocks that are traded 

on exchanges around the world, 

of which more than two thirds are 

Shariah compliant. 

Hands-on scholarly input 

In addition to the screening software, 

the platform uses a process 

involving its Shariah board in the 

vetting of stocks for possible inclusion 

in the portfolios of the platform’s 

hedge fund managers. 

The Shariah advisor may be 

asked by fund managers about any 

stock that has been rejected. While 

hedge fund managers have access 

to the results of screening software, 

they can also ask the opinion 

of the Shariah advisor whenever 

they encounter a stock where there 

may be questions. For example, the 

manager may have direct access 

to information about a company’s 

plans to restructure debt within a 

certain period of time, or to liquidate 

a business that disqualifies it 

from inclusion, or to merge with a 

larger company and become compliant. 

This information could affect 

whether or not a company meets 

Shariah standards. n 

renowned scholars form al safi shariah supervisory board 

Shariah Capital draws on the top 

tiers of internationally recognised 

Shariah scholars to form separate 

Shariah boards for each of its 

projects. This means Shariah scholars 

work on projects best suited to the 

particular areas of their expertise. 

This process, says Shariah Capital, 

ensures the right scholars develop, 

certify and supervise the financial 

products and services endorsed by 

the company. 

The scholars on the Al Safi Shariah 

supervisory baord is made up of 

leading scholars in Islamic finance 

drawn from Bahrain, Malaysia, the 

US and UAE. 

Sheikh Nizam Yaquby (Bahrain), 

chairman 

Sheikh Nizam Yaquby has an 

advanced degree in Economics 

and Comparative Religion from 

McGill University and has authored 

numerous fatwa related to innovative 

Shariah-compliant financial products. 

Sheikh Nizam is internationally 

known as one of the leading scholars 

of modern Islamic finance. 

He serves on the Shariah 

supervisory boards of over 40 

financial institutions worldwide, 

including several key memberships on 

the boards of the Dow Jones Islamic 

Market Indexes and the Auditing and 

Accounting Organization of Islamic 

Financial Institutions (AAOIFI). 

Sheikh Nizam is an advisor to 

a number of banks and financial 

institutions including National 

Bank of Abu Dhabi, Investcorp, 

Gulf Finance House, Citi Islamic 

Investment Bank, Royal Bank of 

Canada, Islamic Bank of Britain 

and European Islamic Investment 

Bank. He is frequently called upon 

to consult with governmental and 

regulatory authorities on issues 

related to Islamic finance 

Having taught tafsir, hadith and 

fiqh in Bahrain since 1976, Sheikh 

Nizam contributes original research 

on many aspects of modern Islamic 

finance and is the author of several 

articles and publications published 

in English and Arabic. He recently 

participated in the development and 

certification of several international 

sukuk issues. 

Dr Mohd Daud Bakar (Malaysia) 

Dr Mohd Daud Bakar is the 

president/CEO of the International 

Institute of Islamic Finance and 

Amanie Business Solutions, a 

consulting company. He is also the 

chairman of the central Shariah 

advisory council of the Central 

Bank of Malaysia and a member of 

the Shariah advisory council of the 

Malaysian Securities and Exchange 

Commission. He is considered 

the leading authority on Islamic 

legal theory and Islamic finance in 

Malaysia. 

A former associate professor 

in Islamic law and deputy rector, 

student affairs and disciplines, at 

the International Islamic University 

Malaysia, his areas of specialisation 

include Islamic legal theory, Islamic 

banking and finance and Islamic law 

of zakat. 

Dr Daud is a member of a number 

of international Shariah supervisory 

boards including the Dow Jones 

Islamic Market Indexes, HSBC 

(Malaysia), Unicorn Investment 

Bank (Bahrain), BNP Paribas, Oasis 

Asset Management, the Japan Bank 

for International Co-operation, the 

Shariah board of AAOIFI and others. 

Dr Mohammad Abdul Rahim 

Sultan Al Olama (UAE) 

Dr Mohammad Abdul Rahim Sultan 

Al Olama is a member of the faculty 

of Shariah at UAE University and 

a member of the fatwa committee 

at the department of religious 

and charitable affairs in Dubai. In 

addition, he is a member of the board 

of AAOIFI and serves as a member 

of the Shariah boards of Mawarid 

Finance, Manazel Real Estate, Al 

Mada’in Finance and others. 

Dr Mohammad has written 

extensively on modern Islamic 

finance and has presented numerous 

research papers at industry 

conferences. He holds a PhD in 

Islamic law from Umm Al Qurra 

University in Mecca, Saudi Arabia. 

Shaykh Yusuf Talal DeLorenzo 

(US), non-voting executive 

representative 

Shaykh Yusuf Talal DeLorenzo, the 

chief Shariah officer at Shariah 

Capital, is a scholar of Islamic 

transactional law. He is the author 

of Compendium of Legal Opinions 

on the Operations of Islamic Banks, 

the first English/Arabic reference 

on the fatwas issued by Shariah 

boards. Shaykh Yusuf also wrote the 

introduction to Islamic Bonds, the 

2003 book that introduced sukuk. 

His work has appeared in academic 

and industry journals and as chapters 

in books. 

Shaykh Yusuf was a special 

consultant to the Asian Development 

Bank and the Islamic Development 

Bank on their joint project for the 

Islamic Financial Services Board. He is 

a member of the Council of Scholars, 

ISRA, Central Bank of Malaysia and 

a member of the governing council 

of the International Centre for 

Education in Islamic Finance (INCEIF) 

in Malaysia. Recently, Shaykh Yusuf 

was appointed a member of AAOIFI’s 

Shariah board. 



success of al safi 

Investors keen to find route to 


Islamic scholars have long disagreed about the merits of hedge fund 

investments. To many, common hedge fund techniques such as short selling and 

leverage can never be squared with the principles espoused by Shariah. 

To others, concepts used successfully in other spheres of Islamic finance such as 

the sukuk market can be tweaked to make hedge fund investment acceptable. 

For the past 10 years there have 

been various attempts to develop 

a Shariah compliant hedge fund 

investment route to cater for ethical 

Islamic sovereign wealth investors, 

pension funds, other institutional 

investors and retail investors. 

Several have launched and failed, 

mainly due to the lack of a significant 

sponsor prepared to supply the 

seed capital necessary to create a 

profitable platform. Although several 

fund-linked derivatives exist, 

their uptake among the Islamic 

investor community has been slow 

with assets dripping in rather than 

flowing. 

While significant assets from 

Islamic investors have gone into 

alternative funds and hedge funds, 

there is a growing demand for Shariah 

compliant hedge funds. With a 

serious alternative to non-Shariah 

compliant investing in existence 

through the Al Safi platform, Islamic 

investors and institutions can begin 

to diversify portfolios and add alternative 

investment strategies that 

conform to the principles and ideals 

of the Islamic faith. 

Factors that in the past restricted 

the growth of Shariah compliant 

hedge fund investing – such as 

increased fees, restricted investment 

universe and lack of world-class 

managers – have been solved by the 

Al Safi platform. By tackling these 

obstacles the Al Safi platform has 

opened the floodgates to a new era 

of liquid, profitable Shariah compliant 

hedge fund investing. 

While the number of funds signed 

up to Shariah compliant platforms 

remains small, the prospects for 

growth are positive. The potential 

demand for Islamic hedge funds is 

huge, say many market observers, 

particularly as investors in the 

Middle East look for new investment 

opportunities. 

“We started creating the Al Safi 

platform 18 months ago because we 

saw there was a demand for Shariah 

compliant alternative investments 

among Islamic institutional investors,” 

says Frank Gerhard, director 

and head of fund linked derivatives 

product strategy at Barclays Capital 

in London. The request, he says, 

came from the sales group. “They 

were looking to expand the Shariah 

governed investable universe for clients,” 

confirms Gerhard. 

There were some Shariah compliant 

products, but collectively they 

did not offer wide diversification 

across instruments or portfolios. The 

team at Barclays Capital sat down 

and the result was the idea to create 

a one-stop-shop solution that would 

allow hedge funds to carry on with 

their lucrative strategies but within 

a Shariah compliant framework that 

did not add unnecessary burdens to 

the hedge fund or impose punitive 

charges on investors. 

Proportion of funds targeting asset class 

(as a % of total) 

The result was the Al Safi Trust 

Platform. The name of the solution 

is indicative of its ambitions. Al Safi 

means ‘pure’ or ‘clear’. What Barclays 

Capital, the investment banking 

side of Barclays Bank, and the Dubai 

Multi Commodities Centre Authority 

(DMCC), an agency of the Dubai 

government, has created is a Shariah 

compliant platform for hedge funds. 

It committed to seed five commodity 

hedge fund managers on Al Safi with 

$50 million each, a total of $250 million 

for a Shariah compliant fund of 

funds products to be offered under 

the Dubai Shariah Asset Management 

(DSAM) brand. 

Al Safi is a comprehensive Shariah 

compliant platform comprised 

initially of single strategy alternative 

investment managers with Shariah 

Capital as the Shariah advisor 

and Barclays Capital as the prime 

broker and eventually the structured 

product distributor. 

Barclays Capital was not the first 

to try to find a solution. Newedge, 

jointly owned by Calyon and Société 

Générale, launched its Shariah 

target asset classes of shariah compliant fund universe 

100 

80 

60 

40 

20 

0 

10 

27 

8 

54 

Global 

1 

27 

7 

67 

Europe 

29 

8 

63 

North 

America 

Middle 

East 

Asia 

Pacific 

Shariah 

compliant 

fund 

universe 

Source: Eurekahedge Islamic Funds Database, Investment Company Institute, Ernst & Young Analysis 

26 

14 

7 

49 

Shariah compliant funds by geographical mandate 

5 

11 

10 

15 

13 

51 

18 

13 

10 

7 

52 

10 

6 

20 

22 

42 

Conventional 

mutual 

fund 

universe 

compliant offering in October 2005. 

Only a handful of hedge funds are 

currently listed on its platform, 

including the Al Raed Emerging 

Markets Fund (North of South Capital), 

the Old Mutual Al Saqr Fund 

(Old Mutual) and the Lucerne Shari’a 

Istithmar Fund (ReachCapital Management). 

London-based Islamic financial 

services company Amiri Capital 

intends to launch a Shariah compliant 

fund of funds within the next few 

months. BNP Paribas is looking to 

offer structured products referenced 

to Shariah compliant hedge funds. 

Citi is believed to be developing an 

Islamic hedge fund platform. 

Despite these various initiatives, 

little progress has been made. However, 

Barclays Capital hopes that as 

investors become more comfortable, 

high-profile allocations by entities 

such as the DMCC could persuade 

other Islamic investors to follow suit, 

in turn causing assets under management 

to slowly inflate. 

“It is possible that some Islamic 

institutional investors may wait 

Other 

Money market 

Balanced 

Fixed income 

Equity 

10 | Access to Islamic Hedge Funds Supplement | November 2008 www.hedgefundsreview.com


typical asset allocations 

Alternatives 

Real estate 

Cash/Deposits 

15% 

Exposure to cash/deposits 

and fixed inc largely 

through balanced funds 

5% 

80% 

Equities dominate 

asset allocation due to 

ease-of-access and 

availability through 

mutual funds 

Mass affluent investors 

Fixed income 

Equity 

Source: Industry Interviews, Ernst & Young Analysis 

until they see others getting involved 

before they start investing in hedge 

funds themselves,” notes Shaykh 

Yusuf Talal DeLorenzo, the chief 

Shariah officer at Shariah Capital, 

one of the companies involved with 

the Al Safi platform. 

“There is potential for Al Safi 

to attract billions in investment,” 

declares Eric Meyer, chairman and 

chief executive of Shariah Capital. 

“Based on this assumption, we have 

been willing to undergo significant 

time and expense to get the platform 

right,” he says. 

The success of Al Safi, Barclays 

Capital believes, will come from its 

entirely different approach, basing its 

short selling mechanism on the concept 

of arboon. An arboon contract 

entitles the investor to purchase an 

asset at an agreed price at any time 

up to the maturity of the contract. 

The investor provides a deposit to 

the counterparty, which is forfeited 

if the investor decides not to proceed 

with the purchase (article, page 12). 

“With the capital support of a 

sovereign government and the prime 

broker and structuring expertise of 

Barclays Capital, the Al Safi Trust 

Platform is a historic development 

that unites modern investment strategies 

with Shariah,” adds Meyer. 

David Rutledge, chief executive 

of DMCC, agrees. “It [the platform] 

enables us to access exceptional 

managers with strong track records 

in order to achieve our goal of delivering 

diversified exposure across a 

range of commodity sectors to both 

institutional and individual investors 

interested in Shariah compliant 

investment products and solutions.” 

While there is still a lot of scepticism, 

not least from the media, those 

involved in the Al Safi platform are 

convinced the solution it presents 

20% 

Allocation across the 

private equity and real 

estate asset classes but 

focused internationally 

15% 

>5% 

>5% 

60% 

Equity allocation split 

between local and 

international 

HNWI/UHNWI 

10% 

Limited investment in 

real estate 

30% 

Cash/deposits allocations 

required to meet shortterm 

obligations 

60% 

Regional listed equities 

dominate allocation 

Takaful operators 

could become a standard for future 

Shariah compliant hedge fund platforms 

and products. 

According to Gerhard, roadshows 

throughout the region by Barclays 

Capital aimed at assessing and 

attracting investor interest in seeding 

more funds has shown “significant 

interest from corporate treasuries, but 

also from banks. We also have some 

players in the wealth management 

space who are interested in seeding. 

There is interest in using the platform 

as an open architecture means 

of creating and launching their own 

products,” explains Gerhard. 

Barclays Capital expects to have a 

commitment from at least one wealth 

manager in the region to go ahead 

and start seeding funds, probably 

by the end of 2008. The investment, 

although relatively small at the start, 

is expected to overtake the $250 million 

seed captial put up by DMCC. 

Gerhard believes there was initial 

scepticism about the idea. However, 

once investors understand the detail 

of the operation and how Barclays 

Capital through DSAM ensures Shariah 

compliance, they are keen to 

become involved. Barclays Capital 

has also made a significant investment 

in both time and money – as 

well as in part staking its reputation 

on the success of the platform – in 

providing its prime brokerage services 

to the platform. 

He points to the blue chip fund 

managers the platform is attracting. 

“There is real appetite from investment 

managers to find a way to 

access the alternative investment 

space in the Middle Eastern region. 

Multi-billion funds with an average 

size of $2–$3 billion in assets under 

management (AUM) are approaching 

us and want to market themselves 

through the platform. The largest 

number of enquiries are coming 

from equity long short managers,” 

says Gerhard. 

Once investors and hedge fund 

managers have been introduced 

to the notion of Al Safi as a “new 

instrument”, the feedback from them 

is extremely positive. “Once managers 

appreciate the concept they are 

keen. They see the platform as a sensible 

way of approaching the challenge 

of delivering Shariah governed 

hedge funds,” Gerhard notes. 

Typical Middle Eastern investors 

already have significant experience 

in alternative investments so they are 

familiar with the concept of hedge 

funds. “At the moment we are seeing 

a very strong move towards Shariah 

governed solutions. If we can provide 

generally attractive returns in 

the Shariah space compared with 

non-Shariah, there is appetite. But 

we have to offer both: attractive 

returns and a credible solution,” 

declares Gerhard. 

Middle Eastern investors are 

already one of the most important 

alternative investors globally. The 

high net worth and ultra high net 

worth individuals as well as large 

institutional investors and banks 

are interested in alternatives. “We 

already see strong interest for the 

ethical investment aspect across the 

board. Investors are already beginning 

to migrate portfolios to Shariah 

compliant vehicles. It depends how 

much of the allocations they can 

move and on the ability of a manager 

to generate returns in the Shariah 

compliant space. We see Al Safi 

as providing a solid environment for 

Shariah governed hedge funds,” concludes 

Gerhard. 

Having the competitive edge 

Gerhard believes Barclays Capital 

through Al Safi has a competitive 

edge. He points to the months of 

negotiation needed to hammer out 

prime brokerage documentation that 

was acceptable not only to the bank 

but also to the Shariah scholars. 

“Yes, the arboon structure has been 

available for five or seven years as a 

theoretical solution to this specfic 

problem. But implementation and 

delivery was the challenging part. We 

had to make sure it met all the requirements 

to provide a proper arboon 

structure and that we could implement 

the solution reliably in the prime 

services context,” Gerhard says. 

Having now found a solution, 

he says Barclays may have a small 

window where it will lead the market. 

But he also believes “it is important 

to have competitors in the market. It 

helps make the market efficient. But 

it’s also good to have the lead with 

a reliable, credible and transparent 

Shariah solution,” notes Gerhard. 

The future of the platform is hard 

to predict. While Gerhard believes its 

capacity is huge, it is also necessary 

to start small and grow. “We need to 

walk before we can run. We’re still 

in the ramping-up phase of the platform. 

We are getting the initial funds 

up and running and broadening discussions 

with seed investors. As we 

grow the platform, we need to make 

sure the funds and infrastructure 

stay within the Shariah requirements 

and that we are offering more and 

more diversification across managers. 

Then we can branch out into 

structured products where we may 

address the need for cash substitutes 

and introduce derivative instruments. 

That’s very much stages three and 

four, after diversification is achieved.” 

Addressing what some may see 

as a delay in launching more funds 

on the platform, Gerhard answers 

simply. “It is about timing. Actually 

our timing was very fortunate. In 

this space returns in commodity and 

equities have not been encouraging. 

By delaying we feel we have given a 

better choice, from an investor’s perspective,” 

he says. 

Barclays Capital was also keen to 

ensure the platform did not penalise 

investors on the fee side or on any 

other economic parameters for 

choosing a Shariah-governed solution. 

“It was quite important from 

the beginning not to have to say to 

an investor choose one or the other. 

Ethical investors are also seeking 

returns. It won’t work if the economics 

are not right. The solution 

has to be sustainable. There is no 

question in our minds regarding 

this,” he declares. 

Looking at the platform, Gerhard 

sees success in simply getting the 

project up and working. He says 

they are at the beginning of the 

process. “On the one hand we are 

very pleased and thrilled that we’ve 

got the pilot off to such a good start 

where other competitors have failed. 

We are enjoying that,” says Gerhard. 

“We have had very positive feedback 

from the industry. Over time 

we will provide further innovations 

available within the same rigorous 

scrutiny. But at the moment we want 

to make sure the confidence of investors 

in this product is justified; that 

they see a transparent platform that 

is guided by Shariah principles. Time 

will tell if the platform becomes the 

Shariah standard. At the moment 

we want to give the market a transparent, 

credible solution,” concludes 

Gerhard. n 

www.hedgefundsreview.com November 2008 | Access to Islamic Hedge Funds Supplement | 11


Prime broker agreement is key to 

Shariah-compliant short selling 

A long/short hedge fund strategy is the plain vanilla of the industry. Finding a 

Shariah-compliant way to achieve the same strategy is at the heart of the Al Safi 

hedge fund platform. Finding a workable solution was a complex task. 

Short selling is not new. It dates 

from 1609 when Dutch trader Isaac 

Le Maire performed the first short. 

His outrageous act led to the first 

stock exchange regulations: a ban 

on short selling, revoked in 1611. 

Today short selling is one of the 

most popular techniques used by 

hedge funds to protect and, hopefully, 

increase their investors’ money. 

The majority of shorting is a way 

to ‘hedge’ a long position on a particular 

stock. 

The idea is that a short seller can 

profit from a stock price going down 

by borrowing a security and selling 

it, expecting it will be cheaper to 

repurchase at some point in the 

future. When the seller believes the 

time is right, or when the lender 

recalls the shares, the seller buys 

back the shares and returns them to 

the lender. 

Short sellers borrow from brokers, 

who in turn borrow the shares from 

investors holding the shares ‘long’ 

(for a number of years). A short 

seller takes a fundamentally negative 

view on a stock, selling high 

and buying low. 

The technique helps balance the 

market. Short sellers target overpriced 

stocks or markets. Hedge 

fund managers use shorting as a 

way to protect (or hedge) other long 

positions. 

Under Shariah law, however, this 

practice is not permitted. Finding a 

way to replicate the hedging principle 

used by the majority of hedge 

funds was one of the main challenges 

to establishing the Al Safi 

platform and other attempts in the 

past to make hedge funds Shariah 

compliant. 

The conventional methods for 

hedging, and in particular shorting, 

are not acceptable in Shariah 

finance. However, scholars and 

experts have come to a consensus 

view that it is possible in theory to 

use classical transactional models 

like salam and arboon to provide 

investment managers with effective 

tools for hedging and managing 

risk, including an ability to profit 

from falling share prices. 

Fatwa key to approval 

Formal approval and certification by 

means of a fatwa of Shariah compliant 

short sale methodology is key 

to the Shariah compliant short sale 

alternative. A fatwa has been issued 

for the Al Safi platform and its various 

solutions, including the arboon 

short sale, by a Shariah supervisory 

board of internationally renowned 

scholars. 

The process used by the hedge 

funds on the Al Safi platform establishes 

ownership before the sale of 

the asset to the market. When an 

Al Safi hedge fund wants to short 

a stock, the trader puts an order 

through Barclays Capital Prime Brokerage. 

The difference is that on Al 

Safi the broker facilitates the transaction 

as a purchase and not as a loan. 

The solution uses an arboon sale, 

rooted in classical Islamic law. This 

is when a seller takes an arboon or 

‘earnest’ money, a non-refundable 

down payment or deposit paid by 

the buyer to the seller when the sale 

is concluded, with the provision that 

the contract is completed within a 

set period of time. 

Although both the salam and 

arboon models have been approved 

by Shariah supervisory boards 

around the world and are routinely 

used by Islamic and multinational 

banks with Islamic clients, only the 

Accounting and Auditing Organization 

of Islamic Financial Institutions 

(AAOIFI) and the US Securities 

and Exchange Commission (SEC) 

have found the arboon model suitable 

for use. 

The arboon short sale replicates 

a conventional short sale without 

the borrowing-to-sell method of 

shorting used by conventional 

prime brokerages for hedge funds. 

A complex transactional process 

using arboon short sale is needed 

to achieve the same economic result 

(and profit) as a conventional short 

sale. Different Shariah, regulatory, 

legal and commercial elements are 

involved and the legal documentation 

is extensive. 

No matter how willing a hedge 

fund manager may be to comply 

with the investment guidelines specified 

by a Shariah supervisory board, 

it would not be enough. This is 

because a hedge fund manager does 

not control the short sale process but 

depends on the prime broker. 

Prime broker role 

Only a prime broker can provide 

the complicated series of services 

required for Shariah compliant short 

sale transactions or has the contracts 

that satisfy legal, regulatory, 

exchange and prime broker credit 

and balance sheet requirements. 

In a Shariah compliant arboon 

short sale, stocks are bought using an 

arboon contract. The investor (hedge 

fund) takes ownership of the stocks. 

The fund does not borrow the stocks 

as in a conventional short sale. 

The arboon short sale uses a similar 

agreement to ensure the investor’s 

ownership of whatever stocks 

are later sold into the market. 

The prime broker (in this case 

Barclays Capital Prime Brokerage) 

agrees to sell stock to the investment 

manager at the quoted (and agreed) 

market price. The investment manager 

makes an arboon down payment 

and assumes ownership of the 

stocks. 

The arboon short sale equivalent 

is structured with a specified 

“date of ultimate settlement of the 

purchase and sale”, at which time 

the unpaid portion of the purchase 

price has to be paid (the closing 

date). This complies with the condition 

stipulated by the Fiqh Academy 

(OIC), an international body of Shariah 

compliant scholars, that a time 

period for payment of the remaining 

purchase price must be stated. 

If the investment manager decides 

not to complete the sale, he returns 

the shares and forfeits the arboon 

earnest money. 

Once the investment manager 

has made a down payment equal to 

a margin account deposit, it is possible 

to arrange through the prime 

broker to sell the stocks bought by 

means of the arboon short sale to a 

third party at the market price when 

the sale is concluded. 

In order to close out the transaction 

in the arboon short sale, 

the investment manager instructs 

the prime broker to purchase the 

required number of stocks from the 

market at the market price. Using 

these securities the investment manager 

ends the arboon and the prime 

broker retains the earnest money. 

The same process is used in a conventional 

short sale. 

The arboon short sale solution for 

hedge funds goes beyond the usual 

development of a financial product 

because Shariah compliance requires 

more than structuring and monitoring 

a fund to ensure compliance 

of the hedging strategy and the securities 

held in the investment portfolio 

by means of screening, investment 

guidelines, and oversight by a qualified 

Shariah supervisory board. 

For hedge funds the arboon short 

sale requires fundamental changes 

to the way trades are processed. The 

contracts underlying the exchange 

of securities must comply with 

Shariah rules. Without these modified 

legal documents, no short sale 

solution, however sound its Shariah 

methodology, can be considered 

Shariah compliant. n 


dubai multi commodities centre 

Al Safi is strategic step for Dubai 

financial services growth 

A strategic initiative of the Dubai government created the Dubai Multi 

Commodities Centre tasked with making Dubai a global commodity hub. 

Established with the objective of 

delivering world-class and specialised 

market solutions to the commodities 

industry, the Dubai Multi 

Commodities Centre (DMCC) also is 

providing industry-specific market 

infrastructure and a full range of 

facilities for the gold and precious 

metals, diamonds and coloured 

stones, energy and other commodities 

industries. 

Rated ‘A’ by Standard & Poor’s, 

DMCC is a free zone authority 

offering tax incentives and other 

services to encourage investment in 

the region and to promote trade. 

“We have to make history and 

approach the future with steady 

steps – not wait for the future to 

come to us,” said His Highness General 

Sheikh Mohammed bin Rashid 

Al Maktoum, vice president and 

prime minister of the UAE and ruler 

of Dubai at the launch of DMCC. 

Strategically located at the crossroads 

of Europe and Asia and with 

access to large emerging markets, 

Dubai has ambitions to become an 

international financial centre, leveraging 

its considerable expertise and 

importance within the commodity 

sector. It is the first dedicated commodities 

centre in the time zone 

between Europe and the Far East. 

Dubai’s financial centre ambitions 

encompass the Gulf states, African 

countries, the Levant, the Caspian 

and the former Soviet Union, as well 

as the Indian subcontinent. With a 

total population of 1.8 billion, this 

region’s combined economy totals 

$1.5 trillion in terms of GDP and is 

growing at a rate of over 5% a year. 

Dubai clearly is positioning itself 

as the business hub of the region. 

Part of this strategic initiative is 

DMCC’s development and management 

of a range of Shariah compliant 

investment products focused 

on commodities through a joint venture 

initiative between Dubai Commodity 

Asset Management (DCAM), 

a wholly owned division of DMCC 

and publicly traded Shariah Capital, 

Inc. The joint venture, Dubai Shariah 

Asset Management (DSAM), is 

owned 51% by DCAM and 49% by 

Shariah Capital. 

DSAM offers Islamic investors 

exposure to a range of commodity 

companies, including those engaged 

in gold mining, oil and gas, alternative 

energy, global natural resources 

and agriculture through some of the 

world’s most experienced commodity 

equity hedge fund managers. 

With the seeding of its fourth 

manager, DSAM provides access 

both to individual strategies and to 

an equally weighted, fund of fund 

solution comprising all DSAM managers. 

This fund of funds is ideal for 

Islamic investors who want an allocation 

in this asset sector without 

the complication of choosing one 

commodity exposure over another. 

“Financial engineers have misallocated 

capital. Investing in commodity 

stocks in a non-leveraged, 

Shariah manner would return capital 

investments to the principles of 

economic growth and development 

rather than trading for its own sake,” 

said Mohammad Jamjoum, DSAM 

general manager, on the launch of 

the venture. 

Access to the individual commodity-linked 

hedge fund strategies 


dubai multi commodities centre 

seeded by the DMCC, as well as to 

the fund of funds comprising all of 

these strategies, is through various 

funds offered by DSAM under the 

DSAM Kauthar brand name. 

Ian MacDonald, executive director 

for the gold division at DMCC and 

a board member of DSAM, is also 

highly involved with DSAM and 

the launch of DSAM Kauthar hedge 

funds through the Al Safi Trust 

Platform. 

The Al Safi Trust is a comprehensive, 

Shariah compliant platform 

primarily for hedge funds. It provides 

Shariah screening and arboon 

sale solutions through Shariah Capital, 

the Shariah advisor, and prime 

brokerage through Barclays Capital. 

Administration and trustee oversight 

are all within a pre-established 

Cayman trust framework. 

MacDonald sees this tying in 

neatly with the mandate of the 

DMCC: to promote trade and 

industry in the commodity sphere. 

With the first five funds on the platform 

expected to offer a range of 

commodities from gold to oil to agriculture, 

MacDonald believes DSAM 

will quickly establish itself as the 

market leader in offering Shariah 

“We really like 

commodities as a 

category and as a 

strategy. We believe 

there is tremendous 

scope in this market 

and that the DSAM 

Kauthar funds are 

best of breed. It will 

now be much easier 

for Islamic investors 

to become involved 

through these 

funds.” 

IAN MACDONALD, 

DMCC 

compliant funds. DSAM and the Al 

Safi Trust Platform also help plug a 

gap in the DMCC’s overall strategy 

to become an international financial 

centre. “We are certainly the physical 

market leader for commodities, 

but we have a gap in financial markets,” 

he says and believes DSAM 

will help bring the physical (commodities) 

side and financial services 

closer together, strengthening the 

offering of both. 

“If you look at the local GCC 

[Gulf Co-operation Council] market 

and listen, there is a crying need for 

Islamic investment products. We 

put our heads together with Shariah 

Capital and looked at how we could 

address this need and overcome all 

the challenges and barriers. Out of 

the discussion came the joint venture 

with Shariah Capital for an 

asset management company covering 

commodity-focused, Shariah 

compliant investment products,” 

comments MacDonald. 

MacDonald believes DSAM and 

the funds it is launching on the 

platform will be taken seriously by 

investors in the region. He believes 

the forward thinking of the Dubai 

government in the late 1990s when 

it committed itself to the commodities 

centre development, could see a 

growing need for leadership in this 

area. Few countries were developing 

policies in the commodity area. 

DSAM’s adaptation of hedge 

funds to be Shariah compliant was 

a perfect next step after DMCC’s 

lead. “We have seeded four funds 

so far [with $50 million each]. We 

really like commodities as a category 

and as a strategy. We believe 

there is tremendous scope in this 

market and that the DSAM Kauthar 

funds are best of breed. It will now 

be much easier for Islamic investors 

to become involved through these 

funds. It is a logical and pragmatic 

approach,” MacDonald says. 

MacDonald believes there is tremendous 

potential in the model 

of Shariah compliant hedge funds 

developed through DSAM. While 

the initial seed capital committed 

was an initial $250 million covering 

five funds, MacDonald says once 

five funds are seeded it “will not be 

the end of the production line. We 

want to develop a multi-billion dollar 

world-class industry. Five funds are 

just a start. As we push forward 

there will be other ideas and initiatives, 

too.” 

Although MacDonald would 

not be drawn on future plans, it is 

clear DMCC and DSAM intend to 

exploit the Al Safi platform. “We 

are at an initial stage. We need to 

see what appetite the market has 

and then move forward,” comments 

Mohammad Jamjoum. 

“Absolutely, we see additional 

funds. But it has taken a lot of time 

to put this platform together. There 

has to be a lot of due diligence on 

both sides. A lot of money has 

been invested to get to this delivery 

point,” points out MacDonald. 

“There is definitely enthusiasm 

for Islamic products. We’ve been 

going out and speaking to a lot of 

potential investors in general in 

the Middle East. What they need, 

what they are looking for, are products. 

There are very few investment 

products that cater to this demand. 

I think there are a lot of investors 

looking for these,” says MacDonald. 

Even with an economic slowdown, 

MacDonald says the potential for 

investment on a large scale is high. 

He points out that commodities will 

still be needed in every phase of an 

economic cycle. Emerging markets 

will continue to grow and the world 

will continue to need more commodities. 

As investment demand picks 

up, MacDonald believes the Al Safi 

platform will certainly be regarded 

as a credible route into alternative 

investment and particularly hedge 

funds. “We are setting the standards 

with Al Safi and DSAM. That is one 

of our goals, that is why it has taken 

us so long to set it up. We are aiming 

for very high levels and if we do 

not have them, there will not be the 

investor confidence in the products. 

That is the key thing. We’ve struggled 

a long time, we made the decision 

to go for the gold standard for 

this initiative,” declares MacDonald. 

There are many reasons behind 

DSAM’s decision to white-label the 

funds on the platform. One strategic 

reason is the forging of long-term 

relationships and alliances with the 

partners involved with the platform, 

like Barclays and Shariah Capital. 

He believes it is important with so 

many jurisdictions involved with Al 

Safi to make sure laws and guidelines 

of a number of countries are 

respected so the platform can create 

products acceptable throughout the 

region. 

DSAM is working hard to ensure 

investors in the region know about 

and understand the investment 

opportunity the Al Safi Trust Platform 

offers. Roadshows presenting 

the platform have visited Kuwait, 

Qatar, Abu Dhabi and Bahrain 

already and more are planned. 

The implicit backing of the Dubai 

government in the project has given 

the project even more credibility. As 

“This platform has 

the transparency; 

it has blue chip 

hedge fund 

managers. People 

are coming to 

recognise now the 

great development 

work we have 

done. People were 

previously thinking, 

why don’t hedge 

fund managers come 

to us, come to the 

Middle East?” 

MOHAMMAD JAMJOUM, 

DSAM 

more high-profile hedge funds join 

the platform, other funds will be 

attracted to this route into Shariah 

compliant fund structures. Already 

DSAM says there are numerous 

enquiries from funds about joining 

the platform. 

According to Mohammad Jamjoum, 

there has been excellent feedback 

from institutions to the Al Safi 

roadshow presentation. He believes 

it is for the simple reason that until 

now there has never been a truly 

Shariah compliant mechanism to get 

involved in hedge funds. He believes 

people need and want investment 

opportunities that are Shariah compliant 

but also offer higher returns. 

“This platform has the transparency; 

it has blue chip hedge fund 

managers. People are coming to recognise 

now the great development 

work we have done. People were previously 

thinking, why don’t hedge 

fund managers come to us, come to 

the Middle East? That’s the feedback 

we were getting. Now we have 

four important hedge funds ready 

to come and speak to investors. The 

platform’s success proves we have 

done our homework,” concludes 

Mohammad Jamjoum. n 


investor access to al safi 

Ethical Islamic investors consider 


There is a growing demand in the Middle East for access to Shariah compliant 

alternative asset vehicles like hedge funds. Fund managers are keen to attract 

Middle Eastern investors without sacrificing winning strategies. 

Ethical Islamic investors want the 

assurance that hedge funds offered 

to them are fully Shariah compliant 

and also offer the same type 

of returns as generally associated 

with this type of investment vehicle: 

uncorrelated to markets, diversification 

of risk and having a variety of 

alternative strategies. 

Issues surrounding structuring a 

hedge fund can be complex. As more 

Middle Eastern countries develop 

their financial markets and with 

continuing high levels of liquidity, 

the future looks bright for hedge 

fund managers targeting the Middle 

East, local start-ups and more institutional 

players alike. 

Middle Eastern investors have 

been investing in the conventional 

hedge fund market for a number of 

years. Gulf Co-operation Council 

(GCC) institutions have within their 

own portfolios followed diversification 

patterns that generally mirror 

global investment thinking. 

Sophisticated Middle Eastern 

investors are also attracted by the 

differing investment returns on the 

variety of alternative strategies 

when compared to conventional 

and regional stock markets, private 

equity, property and oil-based 

returns. These investors are turning 

to hedge funds as a source of stability 

and security during market 

volatility and as a way to diversify 

their portfolios. 

For investors who want a Shariah 

compliant product the Al Safi platform 

may offer an answer. 

The Dubai Multi Commodities 

Centre (DMCC) will manage a range 

of Shariah compliant investment 

products focused on commodities, 

through a joint venture initiative 

between Dubai Commodity Asset 

Management (a wholly owned company 

managed by DMCC) and Shariah 

Capital, a US-based, publicly 

traded company on the Alternative 

Investment Market (AIM) of the 

London Stock Exchange. The joint 

venture, Dubai Shariah Asset Management 

(DSAM), is 51% owned 

by DCAM and 49% by Shariah 

Capital. 

DMCC has provided seeding of 

$50 million for five funds. DSAM 

will develop and seed commoditylinked 

investment products for 

distribution in the UAE and other 

markets. These new funds are set up 

to be fully Shariah compliant, based 

on a strategy and fund structure 

already run by the fund manager. 

The Al Safi platform is independently 

controlled and built around 

independent service providers. Offshore 

law firm Walkers Fund Services 

(Cayman Islands) is the trustee 

responsible for the overall management 

of the platform. Barclays 

Capital acts as prime broker and will 

eventually also provide structured 

products to Al Safi. Shariah Capital 

is the Shariah advisor and Citco 

Fund Services (Dublin) acts as fund 

administrator for all the funds on 

the platform. 

The platform is suitable for institutional 

and individual investors 

who want a Shariah compliant absolute 

return investment. The Shariah 

compliant hedge funds are developed 

as a separate white-labelled 

product by DSAM and distributed 

under their own brand names. 

Access to the strategies seeded 

by DMCC are available through 

new funds offered by DSAM. Investment 

into other Al Safi long/short 

strategies is expected to be available 

eventually through fund-linked 

derivatives (structured products 

offered by Barclays Capital). Once 

more funds are operating on the 

platform, fund of hedge fund products 

will also be available. 

The fee structure for funds on the 

platform are expected to follow the 

usual 2% management/20% performance 

fees charged by non-Shariah 

compliant hedge funds. There 

is no premium charged for Shariah 

compliance. 

The platform is affirmed as Shariah 

compliant by a fatwa issued by 

the Shariah supervisory board. This 

fatwa confirms that the proposed 

investment strategies, investment 

techniques and expected equity 

holdings meet strict Shariah guidelines 

established by the board. 

Shariah Capital, Barclays Capital 

(prime broker) and Citco (fund 

administrator) review all the Al 

Safi hedge fund accounts on a daily 

basis. Barclays Capital generates a 

daily exception report that identifies 

any trade or security not included in 

the platform’s approved investment 

universe. If a fund trades a security 

that has not been approved, Shariah 

Capital contacts the manager 

to reverse the trade or eliminate the 

position, ideally before settlement. 

Investors should be reassured 

by the solidity of the Shariah processes, 

and at the same time they will 

be able to access fund managers 

with proven track records. n 


hedge fund access to al safi 

Middle Eastern investors keen to 

access hedge fund absolute returns 

Hedge fund managers facing narrowing sources of investment for their funds 

are turning to the significant investor base in the Middle East. 

While many Middle Eastern investors 

are willing to put money into 

conventional hedge funds, a growing 

number of ethical Islamic investors 

are keen to see Shariah compliant 

hedge funds. The Al Safi platform 

may offer some hedge funds a relatively 

easy way to become Shariah 

compliant, giving their fund the 

reassurance ethical Islamic investors 

want without disputing the 

fund’s strategy. 

There is no doubt there is an 

attractive pool of investment capital 

not only in the Gulf Co-operation 

Council countries but also in the rest 

of the Islamic world. Tapping into 

this source of capital has not been 

easy for hedge funds. 

Shariah law generally imposes 

restrictions on types of investment. 

It requires that Shariah compliant 

funds avoid transactions in unethical 

goods and services; earning returns 

from financial instruments (interest); 

excessive uncertainty in contracts 

(gharar); trade in debt contracts; 

forward foreign exchange contracts; 

and general forms of financial 

options and similar derivatives. 

Funds cannot use leverage or invest 

in stocks of companies that have 

excessively high debts or leverage. 

A hedge fund that uses derivatives, 

leverage, shorting, margin trading 

and option techniques to achieve its 

absolute return investment goals 

will have some challenges. As with 

all Shariah compliant products, a 

hedge fund strategy would have to 

be certified by a recognised Shariah 

scholar via a fatwa. 

Hedge fund managers interested 

in setting up a Shariah compliant 

fund on the Al Safi platform have 

a relatively simple solution to what 

may seem insurmountable obstacles. 

The Al Safi platform is being 

presented as a turnkey solution 

that provides portfolio screening 

and related Shariah solutions for 

hedge funds. This enables managers 

to operate within Shariah while 

remaining consistent with their 

existing investment strategies. 

A crucial element is the ability of 

the fund to short stocks in a Shariah 

compliant manner. This has been 

solved through the arboon short sale 

(article, page 12). 

To see if a fund strategy is compliant 

with the platform, the Shariah 

advisor, prime brokerage and trustees 

first carry out due diligence on 

the managers’ standards and suitability 

to be included. This includes 

a screening of the fund’s portfolio 

holdings, something Shariah Capital 

can do in 24 hours. 

Trust and sub-trust documents 

are pre-designed, based on industry 

standards for independent offshore 

platforms, managed by offshore 

external counsel. Little negotiation 

of documentation is expected to be 

needed, particularly as the documentation 

is one way to ensure the 

homogeneity of the platform. 

Funds that are accepted set up 

managed accounts. The sub-trust 

opens an account with Barclays 

Capital, the dedicated prime broker, 

including agreements on custody 

and other related matters. The subtrust 

commits the investment manager 

to manage the prime brokerage 

account through an investment management 

agreement. 

The sub-trust and managed 

account are only set up if there is a 

seed investment of at least $30 million 

available. 

Individual managers of funds 

using the Al Safi solution are 

relieved from what Barclays Capital 

calls the “tedious negotiations of 

prime brokerage solutions and offshore 

documentation to ensure Shariah 

governance”. Managers do not 

have to set up a Shariah certification 

framework as that is part of the Al 

Safi solution. Investors are able to 

seed Islamic long/short hedge funds. 

All the hedge fund management 

companies access the platform 

through a sub-trust of the Al Safi 

Trust, domiciled in the Cayman 

Islands. The Shariah supervisory 

board, Shariah advisor, trustees 

and administrator are all part of the 

package. 

An initial and annual certification 

by the Shariah supervisory board is 

issued to confirm Shariah governance. 

There is ongoing monitoring 

of Shariah governance by the Shariah 

advisor, Shariah Capital. 

Al Safi is independently controlled 

and built around independent 

service providers. n 


investing in hedge funds 

Funds offer investment strategies 

for wide range of market conditions 

While hedge funds were originally attractive only to a high net worth individuals 

and family offices, institutional investors are also keen to take advantage of the 

higher returns uncorrelated to markets that hedge funds represent. 

Alfred Jones is credited with the creation 

of the first hedge fund in 1949. To 

neutralise the effect of overall market 

movement, he balanced his portfolio 

by buying stocks he expected to rise 

and selling short the ones he thought 

would drop in price. The effect was to 

‘hedge’ part of the risk due to overall 

market movements. 

The industry has grown rapidly 

with an estimated $3 trillion in 

assets under management. Hedge 

funds now account for close to half 

the trading on the New York and 

London stock exchanges, according 

to some sources. 

Even with the recent market 

instability and financial turmoil, 

few believe hedge funds will disappear. 

On the contrary, this alternative 

investment sector is one of the 

fastest growing and most attractive 

to investors, despite a recent spate of 

redemptions for some strategies. 

The attractiveness of hedge funds 

to investors lies in their generally 

uncorrelated returns to traditional 

markets. Returns of many hedge 

fund investments are not too closely 

related to the ups and downs of 

Assets ($MM) 

2,000,000 

1,750,000 

1,500,000 

1,250,000 

1,000,000 

750,000 

500,000 

250,000 

38,910 

0 

58,370 

Estimated assets 

Net asset flow 

8,463 

95,720 

27,861 167,790 

36,918 167,360 

(1,141) 185,750 

14,698 256,720 

57,407 367,560 

91,431 

374,770 

4,406 456,430 

55,340 490,580 

0 

90 91 92 93 94 95 96 

Source: Hedge Fund Research 

estimated growth of assets/net asset flow 

equity hedge (total) 1990–Q2 2008 

23,336 539,060 

99,436 

46,545 625,554 

820,009 

972,608 

1,105,385 

70,635 

73,585 

1,464,526 

1,868,419 

46,907 

126,474 

194,515 

1,875,708 

1,931,438 

16,469 

12,515 

97 98 99 00 01 02 03 04 05 06 07 Q1 Q2 

08 08 

traditional markets. The funds can 

operate in almost any market. They 

can invest long, like a traditional 

mutual fund, or short, profiting if the 

value of the underlying asset falls. 

Although some question whether 

hedge fund managers will be able to 

continue to produce alpha – returns 

over and above those on the broad 

market in which they operate, generated 

due to the fund manager’s skill in 

exploiting inefficiencies in the market 

– even those achieving only market 

returns (beta) are in high demand. 

The reason is that even a relatively 

poor hedge fund performance is likely 

to be better than anything the more 

traditional long-only and mutual fund 

sector can offer. Even compared with 

private equity and real estate funds, 

the returns are potentially high. 

Hedge fund investing is not for the 

faint-hearted. Investors need to understand 

the risk they take. Historically 

hedge funds offer a unique source of 

return drivers that have generated 

high risk-adjusted returns with relatively 

low correlations to other assets. 

In traditional asset classes such as 

equities or fixed income, active managers 

have essentially two components 

to this performance: the market 

(beta) and excess return versus the 

benchmark (alpha). 

In traditional portfolios, alpha can 

be generated only by overweighting 

stocks considered undervalued within 

the benchmark and underweighting 

securities considered overvalued. 

Hedge funds, unlike long-only managers 

whose total returns are dominated 

by benchmark movements, 

can achieve returns independent of 

normal market cycles. 

Having an alpha focus, hedge fund 

strategies try to exploit market inefficiencies 

in a variety of ways. These 

include buying undervalued securities 

and selling overvalued ones at 

the same time, making macro bets or 

by relying on tactical trading skills. 

These techniques provide a source of 

return different from a portfolio of traditional 

market-driven investments. 

This absence of correlation with 

the markets is what many investors 

want in order to boost their returns 

on investment. 

Hedge funds started out as a tool 

for high net worth individuals to 

boost the performance of their private 

offices. Now hedge funds are a 

tool for institutional investors, particularly 

pension funds and endowments, 

used not only to diversify 

portfolios but also to help increase 

investment returns. 

Over time hedge fund strategies 

tend to exhibit fairly low correlations 

to equities and low or negative correlation 

to fixed income. It is no surprise 

that investors are keen to add 

hedge funds to a traditional asset 

mix to reduce overall volatility and 

generate better returns. 

Large corporate treasuries are 

also using alternative investments as 

a diversifier, often together with protected 

structured products for large 

cash holdings. This is one of the key 

drivers of the significantly increased 

net inflows to hedge funds. 

While there are a plethora of 

hedge fund strategies, the most 

common is long/short equity. It is 

certainly considered the largest category 

in terms of the numbers of 

hedge funds. But even this relatively 

simple and common strategy runs 

into significant problems for any 

investor applying Shariah principles. 

While the conventional long/short 

strategy is outside the precepts of 

Shariah law, it has taken considerable 

time and money to find a way 

to match the Shariah principles with 

the way in which the hedge fund 

strategy operates (article, page 17). 

In the aftermath of the credit 

crisis and the financial market chaos, 

hedge funds are expected to continue 

to play an even stronger role in creating 

liquidity and making markets 

more efficient, according to some 

market observers. Finding ways to 

enable hedge funds to operate in a 

Shariah-compliant way will open 

this alternative investment vehicle to 

more investors. 

Hedge fund managers for their 

part are eager to find ways to modify 

strategies and the way they create 

alpha in order to adhere to Shariah 

principles so that investors in the 

Islamic community can take advantage 

of this alternative investment 

strategy. 

It is also likely that hedge funds 

will become more transparent following 

the financial turmoil of recent 

months. Regulators will be paying 

more attention to their activities, as 

will investors, keen to ensure that 

operational and counterparty risks, 

for example, are addressed. 

Analysis of operational risks 

involved with hedge funds includes 

issues such as safe custody of 

assets, pricing policy and checks and 

balances within the investment management 

company. The assessment 

of credit and market risks is another 

area investors will want to see managed 

better in future. n 


fund profile 

Strong commodity focus dominates 

first funds chosen for Al Safi 

Dubai Multi Commodities Centre, an arm of the Dubai government, invested 

$150 million in three commodity-related hedge funds that will trade commodity 

equities in compliance with Islamic religious principles. Two more funds are 

expected to join the first three for a total seed investment of $250 million. 

Three separate funds – managed 

by Tocqueville Asset Management, 

Zweig-DiMenna International Managers 

and Lucas Capital Management 

– have each been given $50 million to 

make investments that comply with 

Shariah law. They will invest in commodity-related 

stocks ranging from 

oil to gold and are the first funds to 

become part of Dubai Shariah Asset 

Management (DSAM), a joint venture 

between Shariah Capital and Dubai 

Commodity Asset Management, 

a wholly owned division of Dubai 

Multi Commodities Centre (DMCC). 

The feeder funds will be registered 

in Cayman and branded under 

the DSAM Kauthar name. 

As the first feeder fund, Tocqueville 

Asset Management will 

specialise in gold and precious 

metals stocks. Zweig-DiMenna International 

Managers will focus on a 

range of stocks connected to hard 

assets such as coal and steel. Lucas 

Capital Management will focus on 

oil and natural gas stocks. 

Tocqueville strikes gold 

The DSAM Kauthar Gold Fund is 

the first Shariah compliant hedge 

fund of its kind and the first in a 

family of commodity-linked funds 

offered by DSAM. 

The fund offers Islamic investors 

a disciplined exposure to gold and 

precious metal equities through one 


fund profile 

of the most experienced managers 

in this asset class. 

Investing exclusively in units of 

the Tocqueville Gold Focus Fund, 

the DSAM Kauthar Gold Fund is a 

sub-trust of the Al Safi Trust managed 

by Tocqueville Asset Management. 

The fund’s return reflects 

the performance of the Tocqueville 

Gold Focus Fund. 

The Tocqueville Gold Focus Fund 

aims to produce positive, absolute 

long-term returns using both long 

and short strategies in gold and precious 

metal equities. It will invest 

primarily in the shares of precious 

metal producers. Short selling of 

equities will be used as a defensive 

strategy to dampen the volatility of 

gold prices. 

Tocqueville Asset Management 

is a US-based limited partnership 

registered as an investment advisor 

with the US Securities and Exchange 

Commission. It is the investment 

manager to the Tocqueville Gold 

Focus Fund and to registered investment 

companies, private funds and 

separately managed accounts. 

Tocqueville has been in the asset 

management business since 1990. 

At June 30, 2008 Tocqueville had 

over $6.5 billion in assets under 

management. 

John Hathaway, managing 

director, a portfolio manager and 

a member of both the investment 

committee and the executive committee 

of Tocqueville, has primary 

responsibility for management of 

the fund’s portfolio. Hathaway has 

38 years of experience in the investment 

business, including the last 10 

years with Tocqueville Asset Management. 

Hathaway manages discretionary 

concentrated portfolios for individual 

and institutional clients. 

As an analyst he is responsible for 

researching the natural resources 

sector and special situations. 

Fund investment strategy 

Tocqueville usually invests the 

majority of its net assets in gold 

and securities of companies located 

throughout the world that are 

engaged in mining or processing 

gold. A proportion of the fund’s 

total assets may be invested directly 

in gold bullion. 

The investment strategy of the 

gold fund is value orientated and 

contrarian. The fund invests in 

companies with good long-term 

business fundamentals that are temporarily 

out of favour with investors 

so have a market value lower 

than their intrinsic value. Fundamental 

research-based value orientation 

helps the portfolio manager 

find companies that have good businesses. 

The contrarian orientation 

enables the fund to buy these companies 

at attractive prices. 

Value orientated means the portfolio 

manager looks for companies 

that are selling at a discount to their 

intrinsic value and where business 

fundamentals are improving or 

expected to improve. In assessing 

intrinsic value, the portfolio manager’s 

judgements are based on a 

comparison of a company’s stock 

market value with various financial 

parameters, including historical and 

projected cash flow, book earnings 

and net asset value. 

Generally the fund looks for 

companies that are characterised 

by strong management, business 

franchise, competitive position and 

financial structure, a clear strategy, 

free cash flow, large insider ownership 

and shareholder-orientated 

policies. Contrarian means the fund 

is looking for investment opportunities 

in stocks and sectors that are 

out of favour with investors. 

Stocks are considered out of 

favour when the price has declined 

significantly or has lagged the relevant 

market index for an extended 

period of time and the consensus 

Name of fund: 

Management company: 

Portfolio manager: 

Contact: 

Domicile: 

Asset manager: 

Fund summary: 

among investors is not expected to 

improve. Investment ideas come 

from identifying companies where 

stock prices are down or have lagged 

the market. By analysing the quality 

of the business franchise and longterm 

fundamentals, the fund can 

make a judgement about the company’s 

intrinsic value. With a company 

with strong long-term business 

fundamentals, the fund can wait 

for them to fall out of favour with 

investors in order to buy them at a 

discount to intrinsic value. 

The fund sells stocks when they 

are no longer considered to be good 

value. 

Gold is particularly good if an 

investor wants to diversify its portfolio 

or wants an investment that 

may provide protection against 

inflation or currency devaluation, 

as long as they are also willing to 

accept the additional risks associated 

with investment in gold and 

gold-related securities. 

Middle East opportunity 

Hathaway sees inclusion on the platform 

as a real plus for his company 

and the fund. Not only were the 

majority of the fund’s deals already 

largely Shariah compliant, his aversion 

to leverage and debt made his 

fundamentals of dsam kauthar gold fund 

investment philosophy an ideal 

match for the Al Safi platform. 

Although the fund is starting with 

the seed capital of $50 million, Hathaway 

is confident he will be able to 

grow this to $500 million over a twoyear 

period. “We have the capacity 

to manage that sort of money and 

we believe we are going to be talking 

to investors who are already convinced 

of the attractions of gold,” 

says Hathaway. Although he would 

have been wary of approaching 

investors in the Middle East without 

the support of DSAM and Shariah 

Capital, he is confident the fund will 

be attractive to regional investors. 

Speaking about tailoring the fund 

to be Shariah compliant, Hathaway 

says trading is little different for 

him. The Shariah Capital screening 

criteria are easily accommodated 

and the eligible universe of Shariah 

compliant companies allows him to 

manage the DSAM Kauthar Gold 

Fund suimilar to the Tocqueville 

Fund strategy. He expects Shariah 

to be an important part of what 

Tocqueville does in the future, too, 

and forecasts that the company 

could be looking at a quarter of its 

investors coming from the Middle 

East and wanting products like the 

DSAM Kauthar Gold Fund. n 

DSAM Kauthar Gold Fund 

Tocqueville Asset Management 

John Hathaway 

Mohammad Jamjoum, general manager, Dubai Shariah Asset Management, Dubai 

Multi Commodities Centre, Al Mas Tower, 50th Floor, Jumeirah Lakes Towers, Dubai, 

United Arab Emirates (+971 4375 2227; mjamjoum@shariahcap.com) 

Cayman Islands 

Dubai Shariah Asset Management (DSAM) 

Offers a disciplined exposure to gold and precious metals equities investing 

exclusively in units of the Tocqueville Gold Focus Fund, a sub-trust of the Al Safi Trust 

managed by Tocqueville Asset Management. The Tocqueville Gold Focus Fund aims 

to produce positive, absolute long-term returns using long and short strategies in 

gold and precious metal equities, investing primarily in the shares of precious metal 

producers. It engages in the short selling of such equities as a defensive strategy to 

dampen the volatility of gold prices. 

Asset manager fee: 1% 

Minimum investment: $5 million 

Subscriptions: 

monthly 

Liquidity: 

quarterly, with 30 days’ prior written notice, subject to a 3% redemption fee in the 

first 12 months 

Auditor: 

PricewaterhouseCoopers 

Administrator: 

Citco Fund Services 

Prime broker and custodian: Barclays Capital Shariah advisor: Shariah Capital 

Shariah compliance: 

The Shariah Supervisory Board of the Al Safi Trust Platform consists of Sheikh Nizam 

Yaquby (Bahrain), Mohamed Daud Bakar (Malaysia), Mohammad Abdul Rahim Sultan 

Al Olama (Dubai) and Shaykh Yusuf Talal DeLorenzo (US), the board’s executive 

representative and Shariah advisor to the fund. 


fund profile 

Natural resources stock picking 

focus creates success 

DSAM Kauthor Natural Resources Fund is one in a family of Shariah compliant 

commodity related funds offered by Dubai Shariah Asset Management (DSAM) 

on the Al Safi Trust Platform. Dubai Multi Commodities Centre (DMCC) has 

invested $50 million seed capital into the fund. 

The DSAM Kauthor Natural 

Resources Fund, the third fund operating 

on the Al Safi platform, offers 

investors exposure to the natural 

resources sector. The fund invests 

exclusively in units of the Zweig- 

DiMenna Natural Resources Fund, a 

sub-trust of the Al Safi Trust managed 

by Zweig-DiMenna International 

Managers. Zweig-DiMenna, 

with assets of around $4 billion, is 

one of the oldest names in the hedge 

fund industry. 

Joseph DiMenna and Martin 

Zweig co-founded Zweig-DiMenna 

Partners in 1984. In 1987 they 

started Zweig-DiMenna International, 

an offshore fund. Zweig and 

DiMenna are seen as pioneers in 

long/short equity investing. 

DiMenna is the hands-on head 

portfolio manager for the company’s 

investment vehicles. He has a 

25-year track record in long/short 

equity investing. Throughout his 

career he has actively invested 

across the spectrum of natural 

resources stocks, an area of special 

interest and expertise. 

Zweig-DiMenna launched its first 

natural resources sector-focused 

long/short equity vehicle in 2005. 

As head portfolio manager for the 

Zweig-DiMenna Natural Resources 

Fund, DiMenna is responsible for 

portfolio construction and oversees 

stock selection. 

Zweig’s 40-plus-year career has 

been spent developing and refining 

market risk analytics. Thomas 

Keyes is also portfolio manager 

for the Zweig-DiMenna Natural 

Resources Fund. He joined the company 

in 2001 and is also responsible 

for portfolio construction and 

research for all the Zweig-DiMenna 

investment vehicles. His oversight 

and research in the Zweig-DiMenna 

Natural Resources Fund spans a 

wide variety of natural resources 

stocks. 

Another key member of the 


fund profile 

investment team is Daniel Altman, 

a metals and mining research specialist 

who joined Zweig-DiMenna 

in 2007. He has received a number 

of accolades for his research in the 

sector. 

Other investment professionals 

on the investment team have an 

average of over 15 years working in 

the hedge fund industry. 

Zweig-DiMenna emphasises 

research, trading, risk management 

and client service. The company 

takes a long-term view of client 

relationships. Many of its investors 

have been with the company for 

over 10 years. Its investor base is 

wide including various institutions, 

family offices and funds of funds. 

Throughout Zweig-DiMenna’s 

history, the focus of the company 

has always been on returns rather 

than asset growth. 

Diversified portfolio 

The DSAM Kauthar Natural 

Resources Fund’s return reflects the 

performance of the Zweig-DiMenna 

Natural Resources Fund. The portfolio 

is diversified holding at least 

75 different positions of US and 

global stocks across various natural 

resources sub-sectors and across a 

range of market capitalisation. 

The Zweig-DiMenna Natural 

Resources Fund invests in the securities 

of companies that own or 

develop natural resources or energy 

alternatives as well as companies 

that supply goods and services to 

the sector. These include companies 

involved directly or indirectly 

in exploring, mining, refining, 

processing, transporting, fabricating, 

dealing in, or owning natural 

resources. 

Zweig-DiMenna is known as a 

manager with extensive investing 

experience in natural resources 

stocks, using a rigorous, catalystdriven 

research approach to stock 

selection. Fundamental research 

from a global opportunistic perspective 

is at the heart of the company’s 

success. 

The portfolio is constructed from 

the bottom up and decision-making 

is centralised. Ideas come from 

both the portfolio managers and 

the analysts. The team looks at a 

broad universe of stocks, and makes 

its selections based on in-depth 

research. 

Modelling stocks 

Zweig-DiMenna’s research approach 

includes constructing detailed financial 

models of stocks in the energy, 

basic materials and related sectors. 

Investment professionals meet with 

the management of the companies 

and visit facilities worldwide. Analysts 

also meet with competitors, 

vendors and end-users in the course 

of their research on a company. 

Detailed analysis of supply-anddemand 

trends in natural resources 

in developed and emerging markets 

is another element of its expertise in 

the sector. In addition, the team uses 

cutting-edge technology to assist the 

research process. 

The research team concentrates 

on identifying specific catalysts for 

change in a stock price, including 

earnings surprises, product cycle 

changes, technological innovation 

and regulatory changes. Shifts 

in supply and demand, driven by 

changing industrial and economic 

conditions, are an important factor 

in the investment decisions. Changes 

in commodity price expectations are 

another important consideration. 

Other factors include restructuring 

and corporate events, as well as 

more esoteric concepts, like changes 

in investor psychology. 

On the short side, the investment 

team looks for companies where 

there are fundamentally flawed business 

models, poor earnings quality, 

the inability to generate sufficient 

cash flow, aggressive accounting, 

and mis-pricing based on assumptions 

about the underlying commodity 

prices. The portfolio always 

includes short positions, which are 

seen as profit centres. 

Catalysts for change are monitored 

continuously. Earnings and 

price targets are identified and frequently 

revised. The time horizon on 

stocks is typically six to 12 months. 

The average individual stock position 

size is in the 1%–2% range 

and there are generally only a few 

over 4%. The portfolio is diversified 

across a substantial number of 

individual positions for portfolio 

flexibility. 

Exposure in Zweig-DiMenna’s 

natural resources sector strategy has 

averaged about 75% net long and 

95% gross long in recent years, but 

currently is much lower. The gross 

and net investment exposures vary, 

driven by a combination of opportunities 

and market conditions. 

Risk management is important 

to Zweig-DiMenna. The company 

takes a two-pronged approach. 

First, the company has a risk manager 

who provides the portfolio 

managers with analyses including 

gross, net and beta portfolio exposures, 

as well as the concentration, 

correlation and beta of sector exposures. 

The beta of the individual positions 

is also carefully monitored, as 

is the liquidity of the positions. Positions 

are evaluated on an ongoing 

risk/reward basis and the viability 

of the catalysts that have been identified 

is carefully scrutinised. 

Geographic exposures are also 

carefully monitored. A variety of 

other risk management tools are 

used including BARRA analysis. 

Second, macro-economic risk 

management focuses on interest rate 

trends, inflation, investor liquidity, 

global supply and demand, geopolitical 

risks and industry and 

market trends. n 

fundamentals of dsam kauthar natural resources fund 

Zweig-DiMenna’s 

research 

approach includes 

constructing 

detailed financial 

models of stocks 

in the energy, basic 

materials and 

related sectors. 

Investment 

professionals 

meet with the 

management of the 

companies and visit 

facilities worldwide. 

Analysts also meet 

with competitors, 

vendors and endusers 

in the course 

of their research on 

a company. 

Name of fund: 

DSAM Kauthar Natural Resources Fund 

Management company: Zweig-DiMenna International Managers 

Portfolio managers: 

Joseph DiMenna and Thomas Keyes 

Contact: 

Mohammad Jamjoum, general manager, Dubai Shariah Asset Management, Dubai 

Multi Commodities Centre, Al Mas Tower, 50th Floor, Jumeirah Lakes Towers, Dubai, 

United Arab Emirates (+971-4-375-2227; mjamjoum@shariahcap.com) 

Domicile: 

Cayman Islands 

Asset manager: 

Dubai Shariah Asset Management (DSAM) 

Fund summary: 

Invests exclusively in units of the Zweig-DiMenna Natural Resources Fund, a subtrust 

of the Al Safi Trust Platform and is managed by Zweig-DiMenna International 

Managers. The fund’s return reflects the performance of the Zweig-DiMenna Natural 

Resources Fund account at Barclays Capital. It invests primarily in long/short equity 

securities with stock selection based on a fundamental bottom-up analysis. The 

portfolio is generally diversified with at least 75 different stock positions and includes 

US and foreign stocks of natural resources sub-sectors with a range of market cap. 

The fund may invest in the securities of companies principally engaged in owning or 

developing natural resources (or their alternatives), or supplying goods and services 

to these companies, including entities involved directly or through subsidiaries in 

exploring, mining, refining, processing, transporting, fabricating, dealing in or owning 

natural resources. 

Asset manager fee: 1% 


fund profile 

Teamwork and robust trading 

help fund in chaotic market 

Naming a company after a Native 

American tribe may seem to some 

a bit eccentric, but to William ‘Bill’ 

Harnisch, chief investment strategist 

at Peconic Partners, it seemed 

the perfect solution. The name, he 

says comes from a tribe resident 

in east Long Island, described as a 

wealthy tribe. “I thought it would be 

nice for a hedge fund. In fact one of 

our two disaster recovery centres is 

actually in east Long Island,” Harnisch 

says. 

Harnisch manages all aspects of 

the company’s investment process. 

Harnisch began his career at Chase 

Manhattan Bank in 1968. He joined 

Forstmann-Leff Associates in 1978 

when the business managed $300 

million. 

He began managing that company 

in 1984 and became a majority shareholder 

in 1989. With a strong history 

in absolute return, Forstmann-Leff 

entered the hedge fund business in 

1990, eventually growing assets to 

over $5 billion. The long-only business 

was sold in 1997 and Harnisch 

left at the end of 2004 to concentrate 

on the hedged product now known 

as Peconic Partners, founded in 

2000. The company now has $1.5 

billion in assets under management 

(AUM) in a variety of accounts 

allocated into funds. Long/short 

equity accounts for the bulk of business. 

Harnisch has set up a system 

where all the trades go through one 

‘clearing’ centre before the assets 

are allocated into different funds or 

managed accounts. “We spent a lot 

of money on the system, getting the 

background on stock picking right. 

About 80% of our AUM trade is 

long/short,” says Harnisch. 

For example, one account may 

only want to trade in copper or 

other metal and natural resources. 

The system will automatically allocate 

any trade in those areas to that 

account. Harnisch says setting up 

the system to allocate only screened, 

Shariah compliant trades into a Al 

Safi-based fund would be no different 

and would not change the way 

he trades at all. 

“We’ve set up a good system. A lot 

of money went into the system and 

there has been a lot of research on 

the stock picking side, too. We’ll do 


fund profile 

whatever is needed to make it work 

as well for Shariah compliant trades 

as for our other accounts,” he says, 

noting that at present around 80% of 

all AUM is traded as long/short positions 

through the existing system. 

Peconic likes to take concentrated 

positions. But, according to Harnisch, 

concentration is in the eye of 

the beholder. Others may not find his 

positions that concentrated. 

A different approach 

In general, he believes the fund takes 

a different approach to fund management 

than others. There is a heavy 

stock-picking orientation. “We tend to 

develop ideas beyond economic cycle 

analysis to underlying stock. We pick 

stocks in companies we believe will 

benefit from the current economic 

cycle and over the longer term will 

provide above-average earnings 

growth,” explains Harnisch. 

He explains that the team tends 

to develop ideas looking beyond the 

economic cycle. It will look at a stock 

to see if on the longer term it will 

provide a significant above-average 

early growth, say, for example, 

before the company expands. 

The portfolio ends up as a series 

of core positions that meet specific 

selection criteria on the long and 

short side. Individual positions can 

go up to 5% at cost and up to 10% 

at market value. Typically he says 

“A lot of money 

went into the 

system and there 

has been a lot 

of research on 

the stock picking 

side, too. We’ll do 

whatever is needed 

to make it work 

as well for Shariah 

compliant trades 

as for our other 

accounts.” 

william harnisch, 

peconic partners 

the portfolio will have its top-10 long 

ideas making up 40%–50% of the 

equities traded in the portfolio. 

As an example of how he views 

stocks, he explains his rationale 

behind how the portfolio traded Best 

Buy. “We were shorting the stock in 

1997. We sold short when it was at 

45 and it went down to 12.” 

The stock became interesting 

again to Harnisch when one of 

his themes – a shift from analogue 

to digital – was detected. This he 

believes was a trend that would 

drive sales business by a significant 

amount every year for several years. 

So he corrected his position and 

went long. Between 1997 and 2006 

the stock moved from $2 to $58. 

While the stock remained in the 

portfolio, whenever it approached 

its sale target price, Harnisch would 

review its position. Depending on 

market conditions he would add or 

subtract the position. At the same 

time, he might consider shorting 

competitors to balance the position. 

Now he says the stock is short in the 

portfolio. 

Other core stock positions do not 

necessarily stay as long as Best Buy 

in the portfolio. He says his hedge 

fund may behave a bit differently 

to other long/short funds. Peconic 

trades a lot, constantly reviewing 

positions as stocks approach buy/ 

sell price and using short positions 

to hedge that long position. “We 

trade to adjust the risk of a position, 

not because of a short-term view of 

a name,” he explains. 

The bottom line, says Harnisch, 

is that since June 2002 he has been 

able to create alpha on both long and 

short positions. While results for this 

year are not as spectacular as in 2007 

when the fund was up 64%, it is at 

least up a reasonable 6% plus this 

year. “Our clients are very pleased,” 

says Harnisch, who says compared 

to the current stock exchange performance, 

that is not a bad result. 

Research is key to Peconic’s stock 

selection. He emphasises that the 

company is self-contained. “We only 

use Wall Street to supplement what 

we do.” 

There are seven people in 

research, including Harnisch. Most 

of their time is spent with the companies 

they research, talking to 

managers, visiting the companies. 

A lot of emphasis is also placed on 

income and balance sheet analysis. 

Fundamentals, technicals and quantitative 

research is done on all the 

companies. 

While the fund manager may be 

US based, the fund itself is global, 

although Harnisch points out there 

are no positions in emerging markets. 

The kinds of companies he takes 

positions on are global. “We pursue 

names, mature companies, and these 

are global. You have to look beyond 

geography.” For example, Nestlé and 

Unilever have as much business in 

the US as their equivalent US corporations, 

like General Mills or Kellogg, 

which likewise have significant 

operations outside the US. 

What he looks at is how they 

measure up against absolute return 

and second, if they are beating the 

market average over time. 

Investment into the fund is mixed, 

with high net worth individuals, 

institutions like endowments and 

pensions, and some fund of hedge 

fund money. 

Looking ahead to the Al Safi platform, 

Harnisch does not expect any 

real problems. Peconic, he says, has 

worked with almost every major religion 

and been able to cater for any 

of their demands on the investment 

front. He believes the fund will be 

able to fit into the Shariah compliant 

restrictions without any real change 

to the way it trades. 

Size is no problem 

As to capacity, Harnisch is confident 

the fund could easily handle $4–$5 

billion with current capacity. After 

all, he points out, he had managed 

a $6 billion fund before starting his 

own hedge fund, so size should be no 

problem for him. 

Commenting on current market 

conditions, he admits the US Securities 

and Exchange Commission’s 

shorting ban has had only a limited 

effect on the way he trades. The real 

issue is the environment. “We did 

well in 2007, up all months. But now 

there is no reason. Markets are up, 

down. It is completely different this 

year.” 

Gross exposure in the portfolio 

is down to 58%, dramatically lower 

than in January. Harnisch saw what 

was coming and adjusted the risk 

of the portfolio to the environment 

in January. As things became worse 

as the year moved on, he was able to 

modify the portfolio to keep within 

his risk limits. “What we can do is 

protect capital. We watch our exposure 

very carefully. We take risk 

measures, we look for new risk and 

we ensure we do not have any dangerous 

concentrations.” For example, 

corn usually trades without any 

relationship to the oil price. For at 

least three to four months this year, 

the prices of the two commodities 

traded in parallel. Therefore, Harnisch 

ensured that positions in corn 

and oil were consolidated as one 

Peconic has worked 

with almost every 

major religion and 

been able to cater 

for any of their 

demands on the 

investment front. 

Harnisch believes 

the fund will be 

able to fit into the 

Shariah compliant 

restrictions without 

any real change to 

the way it trades. 

exposure so the portfolio would not 

be exposed to too much risk if prices 

went the wrong way. 

Going with gut instinct 

He sees the success of the fund as 

a combination of a sensible attitude 

towards risk and a good nose 

for companies. He trusts his gut 

instincts perhaps a bit more than 

other hedge funds, but so far it has 

proved true. He steered well away 

from Enron long before it became 

toxic. He thinks the close relationship 

he and his team have with 

industries and specific companies 

means they are able to see good and 

bad trends long before they hit. At 

present he is still interested in the 

analogue to digital story, but thinks 

it has moved away from television 

and is now focused on broadband 

distribution of video and data. 

He believes in incentivising his 

team to come up with the good ideas. 

While basic salaries may be low, 

bonus payments reward analysts 

who come up with good ideas. He 

emphasises that the team – all the 

investment professionals – works 

together, to help generate ideas. 

The system must be working for 

Peconic, believes Harnisch, as the 

fund is doing reasonably well and no 

member of the professional investment 

team has left the company 

since 2004. n 


strategy profile 

Ex Goldman Sachs team finds value 

by keeping to what it knows best 

EnTrust Capital is an independent 

investment manager specialising in 

managing alternative investments 

for public, corporate and Taft- 

Hartley pension funds, foundations, 

endowments, funds of hedge funds 

and high net worth individuals and 

families. 

EnTrust Capital is an independent 

investment advisor registered 

with the US Securities and 

Exchange Commission (SEC) under 

the Investment Advisers Act of 

1940 and has just under $5 billion 

under management. 

EnTrust Capital offers a range 

of alternative strategies including 

a value-driven global long/short 

equity strategy along with a fund 

of hedge funds platform. 

The principals have earned a 

reputation as successful alternative 

asset managers by providing longterm 

risk-adjusted returns, extensive 

transparency and unparalleled 

personal service. 

This is achieved through a high 

level of communication, performing 

its own due diligence and using 

a proprietary risk management 

system. 

The company’s principals have 

been together for over 15 years 

and between them have more than 

73 years of collective investment 

experience. 

The three partners were originally 

at Goldman Sachs, mainly 

working in private wealth with 

high net worth individuals. In 

the late 1990s the three wanted to 

pursue independent research so left 

Goldman. 

EnTrust’s founders decided to 

form an independent money management 

company free from the conflicts 

of a large investment banking 

institution. They believed the client 

relationships they had built up were 

strong and performance results 

were solid. EnTrust was formed 

with $600 million plus assets under 

management from existing clients 

while at Goldman Sachs. 

The investment focus of the 

global long/short equity strategy is 

on bottom-up fundamental-driven 

research. The analysts and portfolio 

managers work in a collaborative, 

team-orientated atmosphere. 

The investment strategy is easily 

defined. EnTrust is a free cash 

flow-driven investor looking for 

sustainable levels of cash that each 

business can generate. It is also 

looking for companies that are well 

managed. 

Since the investment managers 

are long-term investors, the quality 

of management is a critical component 

to the investment thesis. “We 

don’t want to be short well-managed 

companies as they will find their 

way around industry roadblocks 

and we don’t want to invest in poorly 

managed enterprises despite valuation,” 

explains Mark Fife, a managing 

partner of EnTrust Capital 

and portfolio manager of the global 

long/short equity strategy. 



entrust capital global long/short equity strategy 

senior investment team 

Mark Fife has been a managing partner of EnTrust Capital since April 1997. 

Prior to forming EnTrust, Fife spent 14 years at Goldman Sachs where he 

managed money for high net worth clients. He is also the portfolio manager 

of the global long/short equity investment team. 

Two analysts work with him on the fund. Brian Delaney, a managing 

director of EnTrust Capital, has been with the company since August 2001. 

Prior to joining EnTrust he was a manager at PricewaterhouseCoopers, which 

he joined in 1994. 

Adam Comora is a partner of EnTrust Capital and has been with the 

company since July 1998. Prior to joining EnTrust, Adam was an associate 

at Chase Securities, which he joined in 1994, specialising in distressed 

securities. 

“We want to invest in companies 

that have strong balance sheets so 

when the economic or market environment 

is difficult the company 

can initiate their own value-creating 

catalysts by repurchasing stock 

or making accretive acquisitions,” 

he said. 

The focus is also in finding companies 

with high and/or increasing 

returns on invested capital. Companies 

that can generate attractive 

returns without having to constantly 

reinvest large amounts of capital in 

the business are inherently more valuable 

than companies that are large 

users of capital, believes EnTrust. 

“We want to invest 

in companies that 

have strong balance 

sheets so when the 

economic or market 

environment 

is difficult the 

company can 

initiate their own 

value-creating 

catalysts by 

repurchasing stock 

or making accretive 

acquisitions.” 

mark fife, 

entrust capital 

Investment process 

EnTrust has a repeatable investment 

process. It goes through the 

same checklist or process on each 

and every potential investment idea. 

First step is to start with the financial 

documents attempting to ascertain 

the quality and sustainability 

of cash flow and earnings. 

The next step is to spend time 

meeting and speaking with the management 

teams of the companies 

targeted to determine whether or 

not these are people EnTrust wants 

to be in business with. Some of the 

questions the analysts ask are: how 

do they think about capital allocation, 

how much of a stake do they 

own in the company, what is the 

company’s history of results under 

their leadership? 

EnTrust speaks with industry 

consultants and participants, 

former senior employees and competitors 

of the company. This provides 

a greater insight into industry 

dynamics and the particular corporate 

culture of the entity. 

EnTrust follows a disciplined 

investment strategy and attempts 

not to “play away games”. By this 

EnTrust means it only wants to 

invest where it believes it has the 

greatest edge – just like sports 

teams have at home. 

Investors often make mistakes 

by going outside of their circle of 

competence, believes EnTrust. The 

investment team does not look to 

invest in every industry or country. 

“We want to stay in our own 

sandbox and only play where the 

odds of winning are greatest,” says 

Fife. 

The sectors EnTrust focuses its 

efforts on are retailers, industrial 

manufacturers, business services, 

media and entertainment, gaming 

and lodging, restaurants, and 

energy. 

Low volatility goal 

Risk management is critical to the 

way the portfolio is managed. The 

goal is to continue managing a 

relatively low volatility portfolio. 

Entrust continuously reviews the 

sector, geographic and capitalisation 

breakdown. 

In addition, all position sizes are 

listed. “We do not allow any sector 

to be more than 15% net long or 

net short. No individual stock short 

position can be larger than 3% of 

the portfolio at market value. Our 

largest long position can be up to 

6% of the portfolio,” explains Fife. 

EnTrust invests in publicly traded 

equities. On rare occasions it may 

hedge the portfolio by using options 

but this is always a very minor part 

of the portfolio. 

In some circumstances trades 

will include event driven, special 

situations and pair trades, to 

name a few. 

The great majority of positions 

both long and short are longer-term 

investments. “Our average holding 

on the long positions is one to three 

years and shorts average six to 24 

months. Occasionally, we invest in 

stub and pair trades,” says Fife. 

Liquidity is important, particularly 

when some positions are held 

for longer periods. EnTrust handles 

this aspect by keeping the portfolio 

highly liquid. 

“We invest in very few turnaround 

situations. Our portfolio is very 

liquid. As a matter of fact, if we were 

just 20% of the trading volume in a 

stock we would expect that we could 

liquidate 54% of our portfolio in a 

day, 76% in a week and 93% of the 

portfolio in 10 days,” confirms Fife. 

The three senior investment team 

members of the team have all been 

fundamentals of entrust capital global 

long/short equity strategy 

Name of manager: 

Address of manager: 

Contact: 

General company overview: 

together since 2001. Four additional 

analysts have been added in the last 

several years. There has been little 

turnover throughout the company’s 

history. 

EnTrust believes it can manage 

significantly more money in the 

strategy. “We have been looking at 

many more internationally headquartered 

companies in the past several 

years and we plan to continue to 

expand our research team if assets 

under management increase,” concludes 

Fife. n 

EnTrust Partners 

717 Fifth Avenue, 25th Floor New York, 

NY 10022 

Marc Zwebner, managing director of 

business development 

Approximately $4.8 billion assets 

(including multi-strategy fund of hedge 

funds platform), 49 employees, offices in 

the US (New York City, Washington DC, 

Chicago) and the UK (London) 

Global long/short equity strategy: Approximately $670 million AUM in 

strategy as of October 1, 2008 

Target annualised return: 10%–15% 

Target annualised volatility: 4%–7% 

Geographic focus: 

“Our portfolio is 

very liquid. As a 

matter of fact, if we 

were just 20% of 

the trading volume 

in a stock we would 

expect that we 

could liquidate 54% 

of our portfolio 

in a day, 76% in a 

week and 93% of 

the portfolio in 10 

days.” 

mark fife, 

entrust capital 

US, Canada and Europe 


fund profile 

Strategy focuses on natural 

resources and commodity sectors 

The Van Eck Hard Assets 2X strategy seeks absolute returns through long/short 

investments in natural resource equities and commodities. 

Launched in 1996, Van Eck’s Hard 

Assets hedge strategy focuses on 

energy, metals and mining, paper 

and forest products, agriculture and 

other hard asset sectors. The portfolio 

employs a long/short strategy, 

using fundamental research to capitalise 

on mis-pricing and valuation 

discrepancies. 

The strategy is available with 

two different risk profiles. The base 

strategy limits gross exposure 

typically to 150% and has a 3% 

portfolio stop loss. The strategy 

generally maintains low net exposure, 

and typically allocates 20% to 

pairs trades, 60% in relative value 

trades and 20% directional investments. 

The majority of positions 

are in equities with a minority in 

futures. The 2X strategy can have a 

gross exposure of up to 300% and 

has a 6% portfolio stop loss. 

Investment process 

Investment ideas are generated from 

various sources including company 

analysis, commodity analysis, and 

trade structure and evaluation. Portfolio 

construction and risk management 

tools are used throughout the 

investment process. 

Equity investments come from 

a universe of 500 companies segmented 

into specific hard assets 

sectors. Equity positions are concentrated 

in energy, metals and mining, 

forest and paper products, and agriculture, 

while futures investments 

are focused on energy and metals. 

The universe of companies is 

screened for value with a focus on 

companies trading on a net asset 

value basis at a 25%–50% discount 

to peers. Analysts pay particular 

attention to recapitalisations, 

restructuring, consolidation, new 

resource discoveries, management 

changes and other potential catalysts 

that can unlock value. 

Van Eck analysts use a wide 

variety of sources and tools to 

research and evaluate equity investment 

opportunities. For example, 

analysts conduct intensive fundamental 

company research. 

This includes company visits and 

meeting with management. 

These meetings are particularly 

useful for evaluating current 

and projected financials and for 

inspecting operations. Van Eck 

analysts often contact competitors 

to learn their views of the prospect 

company and its industry and are 

able to develop a more complete picture 

of the investment opportunity. 

Van Eck analysts conduct assetbased 

evaluations and earnings and 

cash flow-based valuations. Assetbased 

evaluations are particularly 

important when examining oil and 

gas producers, timber companies, 

resource-based mining companies 

and other asset-intensive resource 

companies. 

Some key considerations in these 

evaluations include asset quality, 

grade, location and accessibility, life 

and potential growth of reserves, as 

well as current and future production 

costs, company hedging programmes, 

balance sheet factors and 

capital expenditure requirements. 


fund profile 

Earnings and cash flow-based 

valuations are particularly appropriate 

for aluminium companies, 

integrated oil/gas companies, pulp 

and paper producers and other 

processing-based companies. In general, 

these analyses focus on valuation 

criteria using peak, trough and 

normalised commodity prices. 

Studying price projections 

Van Eck analysts pay particular 

attention to commodity price projections. 

Supply and demand, inventory 

levels and excess capacity 

define commodity cycles. Van Eck 

believes supply is a critical driver as 

it tends to be fixed over the short to 

medium term. Other elements in the 

price equation are capital spending 

and capacity constraints. 

Van Eck also believes low excess 

capacity or inventory may suggest 

higher future prices while 

high excess capacity or inventory 

could suggest lower future prices. 

Product substitution, new technology 

and structural changes in 

end-user markets can also often put 

a floor under commodity prices or a 

cap on them. 

Analysts also use Wall Street 

research, attend conferences, read 

relevant trade publications and network 

with consultants and others 

involved with the industry. This 

multiplicity of sources helps provide 

a thorough understanding of a 

potential investment. 

Various types of trades – commodity/equity, 

equity/equity and 

commodity/commodity – are used 

to construct the portfolio. Trades 

are monitored for position size, volatility 

and liquidity. The degree of 

analyst conviction on the position is 

also taken into account. 

The strategy’s typical portfolio 

has 20–30 trades comprising 30–60 

positions. For the original hard 

assets hedge strategy, typical maximum 

net equity exposure is -20% 

to +45% while the typical maximum 

net commodity exposure is -25% to 

+25%. 

Maximum gross exposure is 

150%. Sector net exposures typically 

range from -10% to +10%. 

The typical maximum net exposure 

ranges from -35% to +35%. 

For equity positions, the typical 

exposure ranges from -3% to +3% 

and the maximum from -5% to 

+5%. Commodity exposure is typically 

from -5% to +5%. For the 2X 

portfolio, exposure ranges are twice 

as wide. 

In general, the team reviews 

strategy performance monthly and 

annually. This review helps in setting 

entry and exit strategies, spotting 

emerging trends and identifying 

changes in market sentiment. 

Risk management is a high priority 

for the investment team. Risk 

is monitored at several levels. Position-level 

risk is subject to a stopbased 

system. Directional trades 

and relative value trades have individual 

stops. Paired trades have one 

stop based on the spread between 

the two instruments. 

The typical risk of an individual 

position is 20–30 basis points with 

a maximum of 50 basis points. 

Positions are closed when the stop 

is reached, when valuation or technical 

targets are reached, or when 

the trailing stop is triggered. 

If the portfolio is down 3% in a 

single month (6% for the 2X portfolio), 

the manager will neutralise 

it. Thus far, this has resulted in a 

maximum drawdown of 7.6% since 

May 2000. 

Note: This material shall not constitute 

an offer to sell shares in any 

fund. Past performance does not 

guarantee future results; current 

performance may be lower or higher 

than the performance quoted. Van 

Eck may change the method used 

to evaluate companies and portfolio 

methodology used from time to time 

and over time. n 

Risk management 

is a high priority 

for the investment 

team. Risk is 

monitored at 

several levels. 

Position-level 

risk is subject 

to a stop-based 

system. Directional 

trades and relative 

value trades have 

individual stops. 

profile of hard assets hedge strategy investment team 

The nine-person investment team 

is experienced and stable, with no 

departures since 2000. Each member 

specialises in a particular sector. 

Derek van Eck, portfolio manager, 

has over 15 years of investment 

management experience and over 

10 years with Van Eck. He has been 

the portfolio manager of the Hard 

Assets hedge strategy since its 

inception in 1996 and is responsible 

for overseeing its investment 

process and risk controls, and the 

hiring of analysts on the team. 

Van Eck is also a member of the 

investment team that manages 

the long-only Van Eck Global 

Hard Assets Fund and the Van 

Eck Worldwide Insurance Trust’s 

Worldwide Hard Assets Fund. 

Charles Cameron, trader, joined 

Van Eck Global in May 1995 as 

director of trading and has over 20 

years’ experience in international 

and financial markets. He oversees 

all trade execution for the fund 

and, in particular, specialises in 

constructing commodity spread 

and directional trades. He is also 

responsible for macro analysis with 

respect to the commodity markets. 

From 1989 to 1995 he was a trader 

in euro bonds and emerging market 

debt for Standard Chartered. 

Gregory Krenzer, trader and risk 

manager, joined Van Eck Global 

in 1994 and has over 10 years of 

experience in commodities, natural 

resource equities and global fixed 

income. He is the risk manager for 

the fund and specialises in trade 

construction. Prior to this, Krenzer 

worked at Merrill Lynch from 1993 

to 1994 where he researched 

investments for a high net worth 

group. 

Shawn Reynolds, senior analyst, 

joined Van Eck Global in 2005 as 

senior analyst focusing on energy. 

Prior to joining the company, he 

worked at Petrie Parkman & Co as 

an energy analyst covering US oil 

and gas exploration and production 

companies. 

Samuel Halpert, senior analyst, 

joined the company in 2000 and 

covers forest products, tankers, 

refiners and alternative energy. Prior 

to joining Van Eck, he worked at 

Goldman Sachs as an analyst/trader 

for a $50 million global macro 

hedge fund. 

Joseph Foster, senior analyst, 


a precious metals mining analyst. 

Since 1998, he has been the 

portfolio manager of the company’s 

flagship fund, International 

Investors Gold Fund. From 1993 to 

1996, Foster was a senior geologist 

at Pinson Mining Company where 

he managed an on-site geology 

department and conceived and 

implemented a comprehensive 

exploration programme on a 35 

square-mile land position. He has 

over 15 years of experience in 

geology and mining. 

Charl de M Malan, senior analyst, 

joined the company in 2003 as a 

precious metals and mining analyst. 

Prior to joining Van Eck, he worked 

at JPMorgan Chase as an equity 

research sales analyst specialising 

in South African mining, natural 

resources and financial sectors. 

Edward Mitby, senior analyst, 


senior energy analyst. His work 

focuses on alternative energy, 

engineering and construction 

and quantitative analyses for 

alternative investment strategies. 

Prior to joining the company, 

he worked at Sailfish Capital 

Partners as a senior research 

analyst, creating and distributing 

multiple long and short strategy 

proposals for trading equities, 

corporate credit, rates, the ABX and 

mortgages. 

Geoffrey King, analyst, joined 

Van Eck Global in 2007 as an 

energy analyst. King’s previous work 

focused on the exploration and 

production, refining, drilling and 

alternative energy markets. Before 

joining Van Eck, King was employed 

by Merrill Lynch in the energy 

investment banking group. 

Dedicated industry consultants 

are also used to complement the 

experience and analysis of the 

in-house team. 


fund profile 

Diverse talents at core of 

healthcare investment success 

OrbiMed is the world’s largest 

healthcare-dedicated investment 

firm, with over $5 billion in assets 

under management. 

OrbiMed’s investment business, 

founded in 1989, invests across the 

spectrum of healthcare companies 

– from private start-ups to large 

multinational companies. 

The company manages a family 

of healthcare-focused investment 

funds including the Caduceus 

Capital hedge fund, two investment 

trusts listed on the London Stock 

Exchange (the Finsbury Worldwide 

Pharmaceutical Trust and the 

Biotechnology Growth Trust) and 

a family of global venture capital 

funds. 

OrbiMed’s investment team 

includes over 30 experienced professionals 

with backgrounds in science, 

medicine, industry, finance and law. 

The company’s diverse team of 

professionals has a unique understanding 

of industry dynamics 

through active participation in 

public and private companies. 

These professionals work together 

in a collaborative approach which 

integrates the analytical insights 

derived from both the public and private 

equity markets. OrbiMed seeks 

to be the capital provider of choice 

for life sciences companies pursuing 

growth and new opportunities. 

Where appropriate, particularly 

within its venture capital funds, 

OrbiMed actively supports its 

portfolio companies in achieving 

strategic, financial and operational 

objectives via participation on the 

board of directors. OrbiMed professionals 

currently serve on the board 

of directors of dozens of different 

life sciences companies. 

The healthcare sector has a powerful 

set of three secular growth 

drivers, believes Carter Neild, general 

partner at OrbiMed Advisers. 

First is demographics. Western 

populations are on average ageing 

rapidly, with the proportion of 

the population aged 65 and over 

expected to increase by 50% or 

more in most western countries over 

the coming decades. 

This ageing trend augurs well 

for the future growth of healthcare 

markets, as medical expenditure for 

people over 65 years of age is on 

average four times higher than for 

those under 65. 

China is a particularly exciting 


fund profile 

Western 

populations are 

on average ageing 

rapidly, with the 

proportion of the 

population aged 65 

and over expected 

to increase by 50% 

or more in most 

western countries 

over the coming 

decades. 

demographic story, as its elderly 

population is expected to double by 

2025, thanks partly to the controversial 

“one child” policy. 

Innovation is a second key growth 

driver. New markets are created 

over time thanks to the ineluctable 

progress being made in the scientific 

understanding of human diseases. 

Innovative new drugs and treatments 

inevitably flow from this 

greater understanding of disease. 

For instance, the recently launched 

vaccines for the human papillomavirus 

are poised to effectively 

prevent the vast majority of future 

cases of cervical cancer. 

There are over 1,000 such potentially 

promising products in the 

drug industry pipeline currently 

under review by OrbiMed. OrbiMed 

believes the future is particularly 

bright for the biotechnology sector 

as more biotechnology companies 

are becoming profitable. 

A total of 73 biotechnology and 

emerging drug discovery companies 

(including acquisitions) had 

attained profitability as of 2007 and 

a further 32 companies are expected 

to achieve profitability by the end of 

2009. 

Growth drivers 

The final growth driver for the 

healthcare sector is the trend 

towards rising global affluence. A 

disproportionate share of income 

growth tends to be spent on healthcare 

as the newly minted middle 

classes in many countries begin 

to demand quality western-style 

healthcare. 

This is particularly true in China 

and India where there is a rapidly 

growing middle class demanding 

better medical care. 

China’s pharmaceutical market 

is growing two to four times faster 

than western markets. Emerging 

markets overall account for more 

than one third of recent pharmaceutical 

growth. 

These factors lead OrbiMed to 

believe that investing in healthcare 

now is a compelling opportunity. 

Historically low valuations and noncyclical 

growth companies coupled 

with rampant merger and acquisition 

activity creates an attractive 

entry point for investors today. 

Pharmaceutical and biotechnology 

companies have generally 

underperformed the broader 

markets by a cumulative margin 

of 25%–40% over the past six or 

seven years, according to Neild. As 

a result, valuations for larger biotechnology 

companies are now near 

historical lows by measures such as 

price/earnings ratios and price/sales 

ratios. 

Non-cyclical growth opportunities, 

such as healthcare companies, 

have often rotated into favour 

during previous economic recessionary 

environments. 

For example, the Amex Biotechnology 

Index increased 46% in 1990 

and over 190% in 1991, a period 

similar to today’s economic environment. 

Merger and acquisition activity 

is strong. The large pharmaceutical 

companies need to pay high prices 

for biotechnology acquisitions. 

A dozen significant acquisitions 

have been announced in the past few 

months, including a $7 billion offer 

for Imclone Systems from Eli Lilly 

and a $44 billion offer for Genentech 

from Roche. 

Lack of competition 

The business of investment in the 

healthcare sector has become far 

less competitive over the past few 

years thanks to a significant amount 

of attrition among the group of specialist 

hedge funds focused on the 

healthcare sector. 

Less competition provides the 

survivors, such as OrbiMed, with 

greater market inefficiencies and 

less competition for new ideas. 

For all these reasons Neild 

believes that OrbiMed’s long/short 

specialist healthcare fund, Caduceus 

Capital, will continue to prosper 

as it has over the past 15 years. 

Neild believes a long/short equity 

strategy has significant advantages 

in making healthcare investments 

that are not available to a long-only 

static approach. 

Wide dispersion 

First, there is a wide dispersion of 

returns for companies within the 

biotechnology and pharmaceutical 

sectors because these companies 

generally have a ‘binary’ nature 

to their development. Either their 

therapies work, and the stocks go 

up, or the therapies fail along with 

the stocks. 

A long/short equity fund can 

make money from either type of 

outcome and is not solely depending 

on playing the ‘winners’. 

Additional, the ability to manage 

tactically net market exposure is 

also advantageous in the healthcare 

sector, as volatility, particularly for 

biotechnology stocks, can be high. 

The impact of investor sentiment 

changes and retail investor money 

flows combine to create high volatility 

and frequently over-bought or 

over-sold market conditions. 

A long/short equity fund is 

capable of altering net market exposure 

in response to these market 

cycles in order to seek additional 

alpha generation possibilities. 

But this sector is not to be entered 

lightly through generalist funds 

who lack deep scientific and medical 

research experience. 

The highly technical nature of 

analysis of emerging drug and 

medical device products requires a 

highly specialised research team. 

percentage of population over 65 

biotech healthline healthy and growing 

30 

% 

25 

2000 

2025 

1,200 

1,000 

Phase 1/Iia 

Phase 1I/III or III 

20 

800 

15 

600 

10 

400 

5 

200 

0 

Source: United Nations 

UK Japan US China 

0 

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 

Source: Goldman, Sachs & Co 


fund profile 

The investment 

team attends 

major therapeutic 

conferences 

and frequently 

reviews relevant 

scientific literature 

and journals to 

keep abreast of 

developments and 

find the companies 

most likely to 

be the target 

of attention on 

either the long or 

short side of the 

portfolio. 

Expertise and research 

Despite these considerable challenges, 

OrbiMed believes it has put 

together a winning formula. 

Its investment team includes 

over 30 professionals exclusively 

focused on the healthcare sector. Its 

activities cover the whole gamut of 

healthcare investments across all 

major geographies, sub-sectors and 

company stages. 

Strategy 

According to Neild, the company 

pursues a simple (in concept) 

strategy. OrbiMed seeks long investments 

in companies pursuing novel 

therapeutics that will be successfully 

commercialised and generate 

meaningful revenues. 

On the short side OrbiMed seeks 

companies pursuing therapies that 

will fail in clinical trials or suffer 

disappointing commercial launches. 

The process is driven by intensive 

proprietary research. The company 

takes a worldwide perspective to 

find the best opportunities globally 

and complements the investment 

process with a rigorous set of risk 

management protocols. 

According to Neild, OrbiMed has 

an edge over other funds because its 

large team gives it the ability to gain 

more extensive coverage of scientific 

and medical news. 

Close contact 

The investment team attends major 

therapeutic conferences and frequently 

reviews relevant scientific 

literature and journals to keep 

abreast of developments and find 

the companies most likely to be the 

target of attention on either the long 

or short side of the portfolio. 

The team has developed wide 

networks and relationships with 

independent medical consultants. In 

addition, it carries out surveys with 

physicians to identify trends and 

new areas of research. 

In a typical year, investment professionals 

from OrbiMed will meet 

with management team members at 

upwards of 90% of the companies 

in their sector. 

They also work closely with the 

private equity team to leverage relationships 

with venture capital stage 

companies. 

OrbiMed has access to agency and 

policy maker views on important 

drugs, speaking with, for example, 

current and former employees of 

the US Federal Drug Administration. 

To facilitate its global research 

efforts, OrbiMed has team members 

based in New York, Mumbai and 

Shanghai. 

Portfolio construction 

Portfolio construction is disciplined 

and research-intensive. From a list 

of 750 public companies (including 

500 US), analysts screen out the 

middle 350 as neither good enough 

to buy nor bad enough to short. An 

analyst typically looks at 50 stocks. 

From the 400 companies 

remaining on the active list, fair 

value estimates and valuation 

screens are created. 

Analysts meet with the management 

of each company at least once 

a year. From this process another 

200 companies are dropped as they 

are seen to have no catalyst for an 

investment thesis. 

The remaining 200 names are 

studied intensively. Detailed business 

forecasts and research are 

undertaken, including frequent 

discussion with company management. 

Analysts working in conjuction 

with the two senior portfolio managers 

make a final selection of long 

and short best ideas on a global 

basis. 

Typically the portfolio holds 35 

core long and 20 short positions. A 

typical mix of positions contains 15 

profitable companies, 20 emerging 

companies and 20 short positions. 

There are daily investment meetings 

to discuss the portfolio. 

As with any hedge fund, risk 

management is a serious issue. 

Bottom-up stock selection emphasises 

companies where risk factors 

and correlations are well understood. 

Net market exposure averages 

60%–70% but is adjusted dynamically 

in response to changing market 

conditions. 

Diversification 

The portfolio is diversified. It is 

typically made up of a selection of 

the big name pharmaceutical companies, 

smaller specialty pharmaceutical 

companies, generic drug 

makers, medical device manufacturers 

and mature and emerging 

biotechnology. 

Exposures are a mix of North 

America, Europe and Asia. Position 

sizes are limited for individual 

equities. Large-cap companies are 

typically sized at 4%–7%, mid and 

small caps at 2%–4% and with 

short sales at 1%–3%. 

more biotechs achieving profitability 

Number of profitable biotechs 

120 

100 

80 

60 

40 

20 

0 

Acquired 

Independent 

Source: OrbiMed Advisors 

Some additional strategies which 

are non-correlated to equities complement 

the core long/short equity 

book, including an options overlay 

strategy and a dedicated effort to 

acquire pharmaceutical royalty 

streams. 

Al Safi link 

OrbiMed has a long-term strategic 

interest in the Middle East. Neild 

expects opportunities in pharmaceuticals 

and healthcare services 

to be attractive to investors in the 

region. 

He believes the way OrbiMed constructs 

its funds will require little 

change to make them Shariah compliant. 

“The nature of the healthcare 

companies we focus on means they 

are not leveraged or have a lot of 

debt. We would not expect to have to 

change the way we run the protfolio 

in any meaningful way,” concludes 

Neild. 

After an initial approach from 

Barclays Capital, the due diligence 

process has begun on both sides 

“We see real opportunities to 

work with Barclays in a strategic 

partnership. We’ve been to the 

region several times and expect 

over time to establish a permanent 

presence in the Middle East,” Neild 

explains. n 

• 73 biotechnology and emerging drug discovery companies have reached 

profitability through 2007 (including 39 companies acquired) 

• Another 32 companies are anticipated to overcome ‘accidents’ to achieve 

profitability by 2009 

• Profitability —> broadens investor base —> increases valuations and liquidity 

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 

Estimate 



Investment approach based on 

deep research is key to Alkeon 

Sticking to your strategy and 

maintaining risk parameters is 

essential, particularly during a dislocated 

market. This is the view of 

Panayotis ‘Takis’ Sparaggis, president 

and chief investment officer of 

Alkeon Capital Management. The 

company was founded after Sparaggis 

exited CIBC Oppenheimer 

with his team that had been running 

a global long/short growth equity 

hedge fund. The split was friendly, 

says Sparaggis, and has resulted in 

a highly cohesive team. 

This should come as no surprise, 

given the collective experience of 

the team, most of whom have been 

involved in the investment management 

industry for more than a 

decade. Sparaggis has been managing 

various hedge fund strategies 

since the early 1990s, initially 

at Credit Suisse First Boston Asset 

Management and then at Oppenheimer, 

where he started a global long/ 

short growth strategy as a proprietary 

account. 

He set up Alkeon to follow the 

same intensive investment process 

he followed at Oppenheimer. 

The company is named after the 

African seabird, Alkyonis, which 

is usually seen in January and February 

as a harbinger of spring in 

Greece (where Sparaggis was born), 

bringing with it warm winds. Like 

the bird, Alkeon has been able to 

give good news to investors. He 

says the company has received net 

inflows in recent months as investors 

perceived the strategy as one 

focused on maintaining value and 

discipline. 

The global long/short equity 

strategy which Sparaggis started 

managing in January 1998, is 

growth orientated. The research is 

bottom-up and focuses on all growth 

sectors, countries and market capitalisations. 

Sparaggis neatly sums 

up the style by explaining the 

approach is “really a private buyer’s 

perspective. We look at a business 

and the question we ask is, is this a 

company where we would put our 

own money? If the answer is ‘yes’ 

we look at the price and other fundamentals,” 

he explains. 

The portfolio aims to be a collection 

of “great assets” says Sparaggis. 

The challenge of finding good 

companies and producing double 

alpha – by this Sparaggis means 

producing alpha on both the long 

and short side of the portfolio – is 

what makes him get out of bed in 

the morning. “I really like this business,” 

he admits. 

The only sectors Alkeon avoids 

are oil, metals, mining and commodities. 

Sparaggis does not believe the 

team’s strength lies in these areas 



“We do not hold 

more than 10% 

in an individual 

security and in 

reality this figure 

is much lower in 

almost all cases. 

We’re fundamental 

investors.” 

Panayotis sparaggis, 

alkeon capital 

management 

and believes that it is a different skill 

set to forecast commodity prices. 

Focusing on growth 

The focus is on growth, seeking out 

the best stocks and also those that 

are being challenged which could be 

candidates for shorting. The process 

concentrates on the profitability of a 

company, its balance sheet, strength 

of its management team and other 

key factors. If these are all positive, 

and show the potential for growth, 

the stock could be a candidate for 

the long side of the portfolio. If the 

equity displays negatives in these 

areas, then it could become interesting 

on the short side. 

Sparaggis believes this technique 

holds true in any market. He is also 

careful only to invest in publicly 

traded, liquid stocks. 

One area of particular expertise 

is in technology, which Sparaggis 

loosely describes as TMT (technology, 

media and telecommunications), 

life sciences and alternative 

energies. With his own background 

– a PhD and Master’s in electrical 

and computer engineering and an 

MBA from the University of Massachusetts, 

as well as an IBM fellowship 

in physical sciences – he 

has the knowledge and capability 

to understand this particular sector, 

although Alkeon is not tied to just 

this sector. 

Part of the attraction of technology 

stocks, says Sparaggis, is 

that companies which innovate are 

decoupled from the economic cycle. 

The focus is on product cycle and 

during disruptive cycles growth has 

little to do with what is happening 

in the economy around it. These 

cycles are clearly defined, with a 

beginning, middle and an endpoint, 

and are relatively short, lasting two 

to three years sometimes. 

By focusing on the product cycle, 

Alkeon looks at what developments 

are likely to add significant value 

to a company, or the reverse for the 

short position. Traditionally the 

portfolio has a 30%–70% net long 

bias. But the real strength, Sparaggis 

believes, is the team’s ability 

to find alpha not just on the long 

side, but on the short side which 

provides excess returns. “Most long/ 

short funds break even on the short 

side over the long run. We can add 

significant alpha on the short side,” 

he says. “If we can provide alpha 

over both long and short positions, 

this enhances the long-term return 

of the portfolio.” 

This technique has been particularly 

successful in technology; Sparaggis 

says they have had “a lot of 

success in technology shorts”. 

For the long side Alkeon looks at 

a company’s probabilities for failure 

or success, given its business model, 

and across its entire structure. In 

technology, a company’s good idea 

could become obsolete overnight. 

“The fundamentals change very rapidly, 

there is volatility in the fundamentals 

and this is what we exploit 

on the short side,” says Sparaggis. 

Ideas from industry 

How Alkeon finds companies is 

simply through a strong network of 

industry contacts. “We get our best 

ideas from the industry, not Wall 

Street,” Sparaggis confirms. He says 

Alkeon meets with hundreds of 

companies every year. 

“We talk to them. It is classical 

deep research. Maybe it sounds very 

tedious and unglamorous, but it is 

highly effective. When we meet with 

these companies we have intelligent 

conversations about business trends. 

We share information. We build 

relationships at a deeper level. It is 

not one-way communication. It is 

not a meeting set up by Wall Street 

where you have a few questions. We 

come prepared. We understand the 

foundation of the business and add 

intellectual depth to the discussion,” 

Sparaggis explains. 

This relationship built with senior 

managers of companies is what 

Sparaggis believes gives Alkeon’s 

team its edge in producing alpha 

consistently on both the long and 

short sides. The experience of the 

team also helps them make the right 

investment decisions during volatile 

times. When markets are dislocated, 

it is difficult to understand them. 

Sparaggis believes his team is able 

to do this and exploit the dislocation 

and volatility while managing risk. 

“The current liquidation and 

redemption process by hedge funds 

and funds of funds has led to a severe 

industry dislocation, which creates 

opportunities. It is very attractive. 

But we still preserve the integrity 

of the process. We go forward with 

reasonable participation opportunities, 

but we do not expose ourselves 

to a level of risk that we would not 

normally have. We are balanced. The 

temptation is to shoot off and buy 

everything. That’s a natural inclination. 

But our ability is in a measured 

response, decisive on stock selection 

and sizing,” says Sparaggis. 

When there is severe downward 

market dislocation people are often 

forced to sell. They need to deleverage; 

they need to raise cash. This 

kind of environment creates opportunities 

with stocks going down 

with no regard to the actual value. 

Nevertheless, Alkeon keeps to the 

same principles, despite the plethora 

of opportunities presented. 

“We keep our focus, approaching 

positions from the private buyer’s 

perspective. Is this a good business? 

Strong fundamentals, strong management 

team, strong balance sheet? 

Bear, bull, dislocated or normal markets 

– there are always opportunities 

and of course better ones in a dislocated 

market. We are always looking 

for the opportunity to make money, 

but we will stick to our fundamental 

principles,” explains Sparaggis. 

He agrees the current market has 

thrown up many attractive opportunities. 

However, he is adamant that 

even with so much opportunity, 

Alkeon must exercise a reasonable 

level of caution, maintain high 

liquidity and above all protect the 

portfolio. “There are three levels of 

portfolio diversification we emphasise. 

We don’t depend only on a 

couple of countries or sectors. There 

is no dangerous concentration. We 

keep a reasonable level of diversity, 

with high liquidity, staying well 

diversified across all countries, sectors 

and individual securities.” 

Avoiding blow-ups 

Sparaggis believes hedge fund 

blow-ups and poor performance are 

caused by two things: excessive leverage 

and excessive concentration. 

“We try to avoid both by design,” 

confirms Sparaggis. “We do not hold 

more than 10% in an individual 

security and in reality this figure 

is much lower in almost all cases. 

Typically, Alkeon holds between 

100 and 150 stocks in the portfolio 

with a one- to two-year horizon on 

all investments. We’re fundamental 

investors. We have price targets for 

both our long and short positions. 

We scale in and trim our positions 

as we approach price targets. We 

take advantage of volatility. Our 

turnover is in direct proportion to 

the underlying volatility,” says Sparaggis. 

But he is clear that Alkeon 

does not allow itself to be seduced 

by the opportunities, particularly in 

times of severe market dislocation 

as evidenced now. 

For all the positions, both long 

and short, a price target is set. Some 

stocks hit the price target relatively 

quickly, within a month or two, while 

others may be held for up to two 

years. Sparaggis explains as a stock 

approaches the price targets, Alkeon 

might increase or decrease its position. 

“We’ll do some opportunistic 

trading as a stock approaches our 

price target. We may retreat, we 

may add to the stock position,” says 

Sparaggis. 

Certainly Sparaggis believes the 

intensive research and extensive 

industry contact network is fundamental 

to Alkeon’s edge and its 

success in picking long and short 

positions. 

Alkeon is not macro focused. It 

uses macro inputs only to assess 

risk as it relates to individual stock 

picks. For example, explains Sparaggis, 

if he is looking at a particular 

company in China or Russia, he 

will look at the macro-environment, 

political risk and any other factors 

relevant to the company so that he 

has a clear view to assess the risk. 

“But macro doesn’t drive investment 

decisions. We look at business 

analysis and macro issues only on 

the risk side. If we are uncomfortable 

with the risk, we won’t invest,” 

he says. 

The approach of Alkeon is consistent, 

says Sparaggis. The company 

will remain diversified and 

global, and the stock picking will be 

based on extensive research across 

all sectors. 

His strategy has proved popular 

with his investors. Sparaggis confirms 

he looks at investors as partners 

in the strategy for the long 

term. “We have a very loyal investor 

base. We make the effort to ensure 

investors understand our strategy 

and understand the asset allocation. 

It is extremely important to us that 

they are in the strategy for the long 

term,” Sparaggis concludes. n 


contacts page 

Contacts for Al Safi Trust Platform 

Fund-linked Derivatives 

Frank Gerhard 

Director, Head of Fund Derivatives Product 

Strategy 

+44 (0)20 7773 1328 

frank.gerhard@barclayscapital.com 

Nicolas Robin 

Fund Derivatives Structuring 

+44 (0)20 7773 5751 

nicolas.robin@barclayscapital.com 

Postal address 

Barclays Capital 

5 The North Colonnade 

Canary Wharf 

London E14 4BB 

UK 

Market Solutions Group 

Harry Martin 

Director, Market Solutions Group – MENA 

+971 4 362 1015 

harry.martin@barclayscapital.com 



The Gate Building 

Level 9 West Wing 

Dubai PO Box 506504 

United Arab Emirates 

Prime Services 

Kieran McCann 

Director, Prime Services Sales 

+1 212 412 1105 

kieran.mccann@barclayscapital.com 

Lauren O’Hara 

Director, Prime Services Sales 

+1 212 412 3176 

lauren.ohara@barclayscapital.com 



745 Seventh Avenue 

New York City 

New York 10019 

USA

Access to Islamic Hedge Funds - Incisive Media

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?