LONDON (Reuters) – A Dubai government agency said on Thursday it committed $250 million (127 million pounds) to a shariah compliant fund investing in a range of commodity hedge funds, a move that will open the way for other Islamic investors.
The Dubai Multi Commodities Centre Authority DMCC will invest $50 million in five hedge funds approved under shariah law, which forbids investments in things such as credit and gambling or alcohol companies.
“We have worked closely with our international partners to engage world-class fund managers with excellent track records in order to offer investors premium shariah-compliant investment solutions,” said Ahmed Bin Sulayem, executive chairman at DMCC.
The funds will be administered by Cayman Island-based Al Safi, an independent trust, and access to the commodity hedge funds for Islamic investors will be available through a fund offered by Dubai Shariah Asset Management.
“Al Safi has been created in response to market demand for shariah compliant alternative investments and the considerable impediments fund managers have faced meeting that demand,” the DMCC said.
“For the Islamic investor, Al Safi offers credibility and integrity.”
The five hedge fund managers are U.S.-based Tocqueville Asset Management, Lucas Capital Management, Zweig-DiMenna International Managers, Ospraie Management and BlackRock.
Barclays Capital will service the hedge funds and London-listed Shariah Capital will advise on shariah compliance.
Dubai Shariah Asset Management is a partnership between Dubai Multi Commodities Centre Authority and Shariah Capital.
“The Middle East is a fast growing market, with estimated investment assets of more than $3 trillion,” said Dan Rice, a managing director at BlackRock.
Al Safi is also planning to offer equity hedge funds, private equity funds and real estate investments.
For many Islamic investors the world of hedge funds has been closed because many of them short — borrow and sell a security on expectation of buying it back at a lower price in the future.
Shariah law prohibits investors from selling something they do not own, but Shariah Capital with advice from shariah scholars have devised a method which allows a short trade to be replicated without the need to borrow a security.
Hedge fund managers on Al Safi that want to short a security place the order with Barclays Capital.
“The difference is Barclays Capital facilitates the transaction as a purchase, not as a loan,” said Eric Meyer, chief executive at Shariah Capital.
“This is done without any administrative impact on the hedge fund manager, his portfolio or performance … They do not need to change their investment styles because Barclays ensures the deals are shariah compliant.”