Ahedge fund is basically a mechanism to invest in or speculate on whatever you want. Commodities, futures, energy, securities, pencil sharpeners if you wish. But the key issue in alignment with Islamic finance is the ownership and speculative nature of hedge funds in general. However, I do believe there is a way. Regardless of how a security or equity is held, or a debt is assigned, its value will fluctuate. While many suggest that Shariah tries to remove the “speculative” nature of an investment and revolves more around ownership, the use of Islamic bonds and other such instruments clearly have a “value” that fluctuates. The issue really comes down to whether you can have a fixed income and a capital gain on the hedge if it is implemented in Shariah. I think with a basket of equities or assets that generate income, and some other components that might fluctuate and give a capital gain – a Islamic hedge might be possible. It would just need to be that when the investor buys into the hedge fund, they are only guaranteed 80% of their principal back or something similar. Anything beyond that would be a capital gain.
Brett King:
Maybe it is easiest to consider the phrase Islamic hedge fund in its three component parts. First – Islamic – which in its widest sense mandates the sharing of risk and reward to the exclusion of interest earning activities, together with prohibitions on a number of investment sectors that need not be reiterated here. Aside from these exclusions, Islamic investors may be encouraged to invest in activities that have a reasonable balance between risk and reward, always taking into consideration individual investors’ particular circumstances. Secondly – Hedge – it follows that a reasonable approach to investment will involve a number of different asset classes, maturities and investment objectives – essentially hedging the risks that would stem from over-exposure to one particular sector, strategy or maturity. Hedge funds typically do just that, spreading risk and endeavouring to mitigate the volatility that occurs from time to time in most financial markets. Finally – Fund – Collective investment schemes are part of the bedrock of Islamic investment, combining the wealth of many Muslims to be invested more efficiently. So why the hysteria when the three words are combined? Probably because hedge funds are presumed, rightly or wrongly, to consist only of highly leveraged investments that make money for their investors by shorting financial instruments using financial derivative instruments to achieve this. Some may, others do not. Thus it is particularly important to study each potential “hedge fund” investment carefully to assess the strategy, investment instruments and operational structure objectively. Any effort to develop Shariah compliant structures that prevent Islamic investors being placed at a disadvantage to others should be applauded. If conventional wisdom is to call such structures Islamic hedge funds, so be it. More importantly, flexibility of thought combined with innovative structures that nevertheless adhere absolutely to the Shariah is essential to the future of Islamic finance. JAMES HUME: Omega Group
There are many empirical examples of Islamic hedge funds developed by reputable asset managers. Clearly, utilizing the basic Islamic contracts (in this case arbun or salam), it is possible to effectively develop Shariah compliant alternatives for long/short strategies and, provided there is sufficient demand, to also change prime broker agreements. The question of whether Islamic hedge funds are an oxymoron is therefore moot. Perhaps the real issue is whether the Islamic investor has an appetite for such products. Should resources be allocated in merely replicating secular products, or should innovation be focused on providing products that capture the essence of Shariah compliant investing through Mudarabah and Musharakah based contracts? I very much vote for the latter. Yavar Moini: Senior manager of Islamic structured finance, Dubai Bank
If there is one question which sums up the self-deluded and surreal world of current Islamic finance, it is this one. A submarine is a beautiful piece of engineering: a triumph of man’s ingenuity and ability to master the world in which he lives by travelling swiftly and silently beneath the waves. But its purpose is malign: it exists to sink ships, or, worse, to launch nuclear missiles. So it is with the Islamic hedge fund. It is a triumph of financial engineering and sophistry: but its purpose, I submit, is fundamentally un-Islamic. Because an Islamic hedge fund, like all of its kin, exists for the sole purpose of making money out of money. An “Islamic hedge fund” is an oxymoron which serves as an extreme example of the underlying truth that Islamic finance, as currently practised, is a “halal window on a haram palace” where money is an object, created as debt by “credit institutions” as a multiple of their capital base. It is depressing but unsurprising that the Islamic finance industry should choose not to question this “fractional reserve banking” money creation, because it makes them so much profit. However, they should be aware that the monetary system which they use is both mathematically unsustainable and the direct cause of the global imperative for “economic growth” which is consuming our planet. There is another path, and the industry should follow it, where: Chris Cook: Principal, Partnership Consulting LLP
Arguably the ideals of Islam, implying Shariah compliance, and the traditional activities of hedge funds, involving speculative short selling, are indeed contradictory, and those who attempt to promote such funds, as implied in the word oxymoron, are at best foolish, and possibly morons, this referring to not only the simple-minded, but also the degenerate. Hedge funds have become an increasingly wide asset class, however, and if funds are engineered on the basis of forward trading transactions, which imply delivery, then these may be legitimate. The devil is in the detail. The problem is that hedge fund managers do not want to disclose the detail. Disclosure to a small committee of Shariah scholars may be insufficient, as the issues need to be debated by the wider Islamic finance community, including those leading Shariah scholars well versed in the complexities of financial derivatives. As western equity markets have been performing well in recent years, and especially in 2005 and 2006, the attraction of hedge funds based on these markets is minimal at present. Islamic hedge funds could, however, be a potentially interesting asset class in the increasingly volatile markets of the Gulf, but at present there are none. If some emerge it might be better if they were differently designated, one possibility being “arboun funds,” the parallel in this case being with Sukuk securities versus conventional bonds or floating rate notes. This would eliminate the unfortunate “oxymoron” designation. PROFESSOR RODNEY WILSON: Director, Durham University
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