Access to Islamic Hedge Funds - Incisive Media

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