Over the hedge

Because full details of the non-Sharia hedge funds have not yet been released by DIB, there is as yet no suggestion that the funds will be linked to what DeLorenzo calls "sin industries".

"This product encourages investors to think of what they are doing as perfectly legitimate. [But hedge fund managers will] invest in stocks that will bring the greatest returns, regardless of what the business of the company may be," he says.

DIB's attempt to open up the conventional hedge fund industry using Sharia principles reflects, in part, the view that direct investment through Islamic hedge funds are not mature enough to be competitive against conventional hedge funds.

There are Islamic hedge funds out there, but not many, and those funds that are available are limited in what investment strategies the funds' managers are allowed to utilise under Islamic law.

"Islamic hedge funds are quite limited compared with conventional hedge funds.

"We see this as a way of getting into the hedge fund market, but doing it in an Islamic way," says Naveed Ahmed, head of investment at Dubai Islamic Bank.

Bossuyt insists the bank did do some business directly through Islamic hedge funds, but most of the time it does it through indirect channels.

"There is a limited choice available of Sharia-compliant hedge funds. Most of them are equity based, long/short equity, which is only one of the strategies of the whole spectrum of hedge fund strategies," Bossuyt says.

"You have convertible arbitrage, event specific, fixed income, you have about 14 different strategies depending on what kind of categorising you use.

"So only going to one specific strategy obviously limits your choice and within that strategy there are only about a dozen Sharia hedge funds," he adds.

Not everyone agrees with this assessment. Eric Meyer, president and CEO of Shariah Capital, claims Sharia-compliant hedge funds can be every bit as competitive as their non-Sharia counterparts.

Earlier this month, Shariah Capital announced that its first Sharia-compliant separately-managed account, which follows a 130/30 quantitative strategy, had realised a 7% net return since its launch three months ago in March.

The account uses hedging techniques under an Islamic Arbun structure.

"In our minds, there is no need to track anything or own anything but the Sharia accounts (hedge funds) and their performance," Meyer told Arabian Business.

"We strongly believe Sharia-compliant investors are interested in actual returns and actual investments versus indirect returns and indirect investments. With work it can be done and has been done at Shariah Capital," he added.

Whether the fund launched by DIB gains wide approval and its technique is replicated on a larger scale, or whether Islamic hedge funds mature enough to be genuinely competitive in the global hedge fund industry, the two sectors need to become more compatible in the future.

Hedge funds and Islamic finance are two of the fastest growing sectors of the financial services industry, but concerns have been raised that Islamic finance's incompatibility with hedge funds could stunt its future growth.

But the fact both Deutsche Bank and Goldman Sachs have come on board for this venture is a sign of the huge amount of investment waiting to pour into the hedge fund industry from the Muslim world.

Bossuyt predicts interest from Islamic investors in hedge funds would not let up, and says other banks have utilised the same model used by DIB.

"We see demand for hedge fund return in a sharia compliant way continuing to grow and grow," he concludes.

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