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Saturday, 21 October 2017

Banks test appetite for hedge funds

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Barclays Capital has become the latest bank to provide a Sharia-compliant hedge fund platform, Al Safi, in June. Barclay’s product allows investors to tap into five hedge funds – managed by Tocqueville Asset Management, Ospraie Managament, BlackRock, Lucas Capital Management and Zweig-DiMenna – focused on commodities. Each of the funds has received a commitment of US$50m from the government-backed Dubai Multi Commodities Centre Authority.

To date, there have been but a handful of players offering hedge funds in the Sharia market. Banks have been interested to test this market, given the huge pool of wealth in the region. But hedge funds are still considered to be a fairly controversial product in the Islamic financial world.

The main problem is that Sharia principles prohibit short-selling, speculative investments and the use of leverage, putting it at odds with the basic workings of hedge funds. Yet providers have so far managed to circumvent these restrictions with bespoke solutions. For example, for the Barclays structure, investors essentially enter into an agreement in which they are entitled to buy an asset at a set price within the life of the contract. This is in effect a way around short-selling.

“Some scholars have approved a few Islamic hedge funds,” said Ghazanfar Naqvi, head of Islamic products at Standard Chartered. “In the long run, the hedge funds market will grow, but scholars are just in the midst of understanding the mechanics of it. We have been discussing with our Sharia board the various structures we have seen from third-party providers. Hedge funds are in the initial stage of development and more awareness needs to be created around them.”

Last year, Deutsche Bank rolled out a total returns swap strategy for a five-year note referenced to an index of fund of hedge funds managed by Goldman Sachs Asset Management. In practice, investors get exposure to the index, which is not Sharia-compliant, without actually investing in it. Naturally, the product received much criticism as it technically meant that the underlying investments of the index could potentially be disallowed under Islamic law. For example, it is forbidden under Sharia principles to invest in alcohol, gambling or pork-related firms.

Apart from Barclays and Deutsche, Newedge – a joint venture between Societe Generale and Calyon – has also entered the hedge fund market. As far back as 2005, Newedge had already launched a Sharia-compliant platform that gave investors access to five hedge funds in 2005.

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