WEST PALM BEACH, FL (HEDGECO.NET) – New types of hedge funds continue to hit the hedge fund market, according to published reports, as Islamic hedge funds have recently launched. The Saudi Economicand Development Company have introduced a new Sharia compliant hedge fund. Efforts in the past to introduce new hedge fund asset classes have been hampered by the strict requirements of suchinstruments, which prevent Muslims from using such strategy to transfer risk to others.
One of such areas of controversy involves the application of short-selling strategies, which Islamic law does not permit. Islam forbids followers of the religion from selling products, which they do not own. Since short-selling strategy involves selling short stocks, which the investor does not own, it is according to Islamic principles equivalent to selling a product, which does not belong to the investor.
Islamic law also discourages Muslim investors from trading forward and futures contracts, because such strategies involve �selling promises�. In the same token, trading options is prohibited because it involves future payment; since such action does not provide any guarantees, this scenario leads to uncertainty, which is forbidden under Islamic principles.
The new launched fund uses carefully chosen words to accomplish the same objectives while also respecting Islamic doctrines. For instance, �stipulating options� is offered in place of �options.� In this context, �stipulating options� involves a situation where the purchaser pays a partial advance for a product at a later date. If for some reason the purchaser decides not to go ahead with the deal anymore, then the seller will keep the advance payment. According to published reports, Islamic lawyers working with British and American lawyers created such framework.
Nicholas Kochan, director of London-based Cosmos Communications explained that hedge fund principle is the “Salam Sale,� involving a situation where one sells a commodity to a buyer against full up-front payment; such product is designed for delivery at a future date. According to Kochan, an investor can hedge downside risk by selling stocks as a Salam Sale, such sale has the same economic result as short selling, but however it does not involve a borrowing element according to him.
No details about fee structure and minimum investments were immediately available on the new Sharia hedge fund offered by the Saudi Economic and Development Company.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
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