Islamic Hedge Fund Investment Comes Under Scrutiny

by Philip Morton, Investors Offshore.com

10 October 2003

Recent reports from the Gulf media have warned of the need for restraint with regard to the much-hyped possibility of Islamic hedge fund investment.

Observing that the increase of interest in such products is curious given recent events in the United States, which have included a probe of the industry and an investment practices scandal, the Arab News service asked:

"Are Islamic hedge funds possible? Judging by recent announcements in the sector it seems so, although these revelations have either been long on hype and short on substance, or at best exploratory."

Conventional hedge fund investment is not an option for Islamic investors, who are not permitted to receive interest payments, or to involve themselves in speculative and uncertain activities.

Speaking at a recent Islamic banking conference in Dubai, the UAE's Minister of State for Finance and Industry, Dr Mohammed Khalfan ibn Kharbash also sounded a cautious note, observing that:

"Highly engineered finance is not necessarily sound finance. Islamic financiers must be aware of the dangers of creative accounting, creative structuring and of over-engineering contracts for the sake of raising margins rather than efficiency gains." He continued:

"Innovation must be a genuine response to investor needs that reaches Shariah compliance and not simply unneccesary layering of products. If the Islamic finance industry is to embrace the new mind-set that has hit the global investment community, it must embrace the underlying investor needs that created it."

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