Experts push alternative asset classes

Islamic finance experts on Tuesday advocated the development of alternative asset classes in the sector, including Islamic exchange-traded funds (ETFs), hedge funds and the securitisation of gold.

Speaking at the International Islamic Finance Forum (IIFF) in Dubai, Muhammad Daud Bakar, one of the world's eminent Sharia-supervisory board members, said that assets classes had become more sophisticated in line with the development of the Islamic finance sector.

"Investors are always looking for more diversification, be it in real estate, equities, gold and silver," said Bakar.

"[In the sector] we started off with Sharia-compliant stocks, then set up mutual funds, then private equity funds, and we have now moved to the products of ETF which have been launched in Bahrain and Malaysia."

Islamic ETFs, Sharia-compliant unit trusts or mutual finds that are listed and traded on an exchange, have been launched over the past year. ETFs in general have gained popularity in recent years, in part thanks to the low fees.

Eric Mayer, Shariah Capital chief executive, said that in order for ETFs to be recognised in the global markets, size of forthcoming ETFS must be at least $500 million.

"If you're going to try and build a best-of-breed hedge fund or ETF, you need leading Sharia scholars," said Meyer.

"You have to get hold of prime brokers, work in offshore jurisdictions, need to get the leading fund-managers, and finally you need an anchor tenant - like sponsorship from a leading financial institution."

Both Mayer and Bakar both spoke about the development of Islamic hedge funds, and about misconceptions within the industry about their Sharia compliance.

"I think hedging has been misunderstood by many people who are dealing with this instrument - but in my opinion, it can be a good way of locking into price," said Bakar.

"A short sale took place 1,400 years ago, where both partners were selling something they did not own, but both of them were in agreement about taking the risk. The price could go up or could go down."

Mayer also said that Islamic hedge funds, despite the various Sharia restrictions, do have a place in the market and are being developed.

"Hedge names have a terrible name on the street, on the high street and on Wall Street," said Mayer. "I feel hedge funds are no different than an old Islamic merchant guild - it is all in the rules."

Though some Islamic hedge funds have been launched in recent years, they have failed due to their relatively small size and cost, Mayer said.

"Previous Islamic hedge funds have failed because they don’t have a prime broker based in New York - that's where the biggest players are in hedge funds," said Mayer, of the US-based firm. "If you can't get the cost comparable to a Western fund, you'll have problem."

The Islamic finance sector should also take further notice in gold as an investment asset class, said Ian C. MacDonald, executive director of gold and precious metals at the Dubai Multi Commodities Centre (DMCC).

"Gold has become the third reserve currency of the world again having been asleep in the 80s and 90s," said MacDonald, who also called the commodity an alternative to the US dollar.

"Gold production is declining in the world. It does protect against inflation and particularly gold will perform well in financial crises that is going around the world."

MacDonald said that the DMCC, owned by the Dubai Government, has introduced Sharia-investment products which securitise commodities like gold, and said that more sophisticated products were in development.

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