Sharp Growth Expected In Shariah Compliant Hedge Funds

by Carla Johnson, Investors Offshore.com

01 April 2004

The growth in Islamic hedge funds is likely to accelerate now that firm rules have been established to ensure that certain trading practices are Shariah-compliant, an international finance expert told the Kaleej Times.

Islamic law forbids many transactions utilized by hedge funds such as short selling, and the use of options and futures and forward contracts. This is because the strict code does not allow the selling of goods that one does not own, or the making of ‘selling promises’ and rights without obligation which create uncertainty. Unsurprisingly, this has made the hedge fund industry pretty much off limits to those seeking to invest in accordance with Shariah law.

However, thanks to a team of Islamic scholars and British and American legal experts, a new range of investment vehicles has been created such as ‘stipulating options’, where the buyer makes an advanced, partial payment for the underlying good at a later date. Should the buyer fail to complete the deal, then the seller keeps this advance.

Another innovation is the principle of a ‘Salam Sale’ where an investor can hedge the downside risk of the sale of a commodity to be delivered at a future date through the selling of stocks. This has the same economic effect as a short sale without the need for any borrowing to take place.

Nicholas Kochan, director of London-based Cosmos Communications, told the paper that rapid growth in Islamic financing is anticipated, with Dubai likely to play an increasingly prominent role in the establishment of Islamic hedge funds.

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