Access to Islamic Hedge Funds - Incisive Media

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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 14 | Access to Islamic Hedge Funds Supplement | November 2008 www.hedgefundsreview.com
investor access to al safi Ethical Islamic investors consider Shariah compliant hedge funds 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 www.hedgefundsreview.com November 2008 | Access to Islamic Hedge Funds Supplement | 15
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