Designing long-only investment products that comply with shari’a, or Islamic law, is old hat. According to Kuala Lumpur–based Islamic Finance News, globally some 400 funds cater to Islamic investors by observing shari’a proscriptions against interest income and investing in companies that produce alcohol or tobacco, among other things. But Islamic law also forbids selling anything one does not own, which would crimp any short-seller’s style. These restrictions have effectively stymied attempts to construct shari’a-compliant hedge funds.
Until now, that is. In June, London-based Barclays Capital and consulting firm Shariah Capital in New Canaan, Connecticut, launched the first shari’a-compliant investment platform. Called Al Safi, it will initially offer five commodities-based hedge funds: a gold portfolio managed by Tocqueville Asset Management, an energy fund run by Lucas Capital Management, a natural-resources fund from Zweig-DiMenna Associates, an agricultural fund run by Ospraie Management and a metals and minerals fund managed by BlackRock. Each has been seeded with $50 million from the Dubai Multi Commodities Centre, an agency the Dubai government set up in 2002 to develop a commodities marketplace. All of the asset managers are based in New York; Al Safi, which means “pure” in Arabic, is based in the Cayman Islands. Barclays Capital acts as prime broker and Shariah Capital as adviser.
To sidestep the Islamic ban on short-selling, Al Safi will use a contract called an arboon, under which a purchaser can pay a fraction of an asset’s price and take possession of it for a set period of time. Al Safi’s independent shari’a supervisory board issued a fatwa, or legal opinion, declaring such contracts acceptable under Islamic law.
“We expect there will be strong retail and private bank interest in places like the U.S. and the U.K., but the bulk of the demand is likely to come from institutional investors in the Middle East and the Far East,” says Richard Ho, head of fund-linked derivatives at Barclays Capital. Adds David Rutledge, chief executive of the DMCC, “Demand for these products is increasing literally by the day.” Moody’s Investors Service estimates that the Islamic finance industry currently has about $700 billion in assets.
Still, some observers sound a note of caution. “Hedge funds are a controversial area for Islamic scholars, and there is much debate in this area,” says Atif Hanif, an Islamic finance specialist at law firm Allen & Overy in London. “There is an appetite from many in the Middle East to make their money go further than traditional equity investing, but there is also a reluctance to invest in something which is still being debated among Islamic scholars.”
