In the developing world of Islamic finance, success isn’t as much about creating alpha as it is about creating alpha within the confines of shari’a law. The issue is especially relevant of late as hedge fund managers hunt for ways to capitalize on the ever-growing pools of petrodollars pouring out of the Middle East.
In June, London-based Barclays Capital and New Canaan, Connecticut–based Shariah Capital launched a shari’a-compliant platform called Al Safi (Arabic for “pure”). Its first five U.S. offerings, each seeded with $50 million from the government-sponsored Dubai Multi Commodities Centre, include four funds managed by New York–based firms — Tocqueville Asset Management (gold), Zweig-Dimenna Associates (natural resources), Ospraie Management (agriculture) and BlackRock (metals and minerals) — and one overseen by Red Bank, New Jersey–based Lucas Capital Management (energy).
Shari’a, the code by which devout Muslims live, encourages prudent investing but bars certain Western conventions like charging interest and short-selling. “Hedge funds are a controversial area for Islamic scholars, and there is much debate,” says Atif Hanif, a London-based senior associate at global law firm Allen & Overy. “There is an appetite from many in the Middle East to make their money go further than [in] traditional equity investing, but there is also a reluctance to invest in something still being debated.”
Al Safi’s approach is to offer an “arboon” — an optionlike contract rooted in Islamic law that allows for indirect investment. Shaykh Yusuf Talal DeLorenzo, chief shari’a officer and board member at Shariah Capital, says demand for such deals will eventually create acceptance.
“But you cannot underestimate the importance of the scholars — they can move markets,” notes Mohammed Amin, the London-based Islamic finance leader for PricewaterhouseCoopers. “The modern Islamic financial industry is in its beginning stage. As more professionals join its ranks, the intellectual capital of the industry will grow, and when that happens better decisions will be made, better processes will be developed, and the quality of every aspect of the industry will improve.”
