How to create Sharia compliant hedge funds

Newedge Prime Brokerage (then known as Fimat), together with Ratings Intelligence, started to work on creating a Sharia-compliant prime brokerage platform. Ratings Intelligence also serves as the Sharia advisor to S&P and other financial institutions. Newedge then supported the launch of the first Sharia compliant fund in August 2005, and in October 2006 two more funds were set up.

Until that point, Sharia compliant hedge funds were mostly done as wrappers, where typically the return of a non-Sharia fund or investment was swapped out and wrapped into a structured product. Then it was stamped by a Sharia Board (given a "Fatwa") and sold into the Middle East market.

Integrated approach: Sharia compliance from trade day and beyond

In such a set-up, the structure could be Sharia compliant, but the underlying fund or product maybe wasn't. Newedge and Ratings Intelligence wanted to go beyond that. In addition, the fees tended to be pretty high on these products. The aim was to help create Sharia hedge or absolute return funds that were as transparent and Sharia compliant as possible, starting at the actual stock trading level.

"We are bottom-up in our approach", says Duncan Crawford, Head of Capital Introduction at Newedge Group Prime Brokerage division. "Like building a house, hedge fund managers have to take care that each step is properly executed, starting from the foundation, which is the trade, or the stock selection."

To ensure that the fund's compliance with Sharia laws is sustained, a sequence of steps and procedures are in place, starting with a stock screening at the trading/stock picking level. Then there is the Newedge prime brokerage operation, which is certified as Sharia-compliant. Additionally, Newedge is working with two administrators which are also certified to be Sharia-compliant.

The portfolio has to remain Sharia-compliant over time, which means the administrator continues to watch and check the portfolio so that the standards are maintained. "In essence, each step is covered. The fund is approved by the Sharia Board, as are the administrator and the prime broker. In our set-up, we use the Ratings Intelligence Sharia Board", says Duncan Crawford. "One of the key points is having a Sharia Board who is as widely recognized as possible......

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How to create sharia compliant hedge funds