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"The history of Shariah compliancy in finance is littered with bad stories. Up until fairly recently, a lot of initiatives were done to win business, or to tap into unaware investors and play on their feelings of trying to be good Muslims" |
Muslims that want to make Shariah-compliant investments have had few opportunities to put their money with hedge funds. Hedge funds will go short, invest in debt and invest in sectors that are not Shariah-compliant, such as gambling. They need that flexibility to create alpha. But with growing wealth among Muslim investors, an increasing number of hedge funds claim to be offering Shariah-compliant products. The legitimacy of their claims, however, is open to debate. All too often, Muslim investors’ money is put to work with non-Shariah-compliant managers but by wrapping several funds’ returns into a new product via a total-return swap, and having a well-paid board of scholars approve the structure, firms can claim to have produced a Shariah-compliant fund.
"It is like the form versus substance argument. You can call these funds what you like, but they are not Shariah-compliant," argues a manager who plans to launch a Shariah-compliant fund of hedge funds in the US.
