July 31, 2006

Will There be an Islamic Hedge Fund?

It is strange, but true. Hedge fund business is now all set to get a religious color. The Arab media reported that Islamic equity investments are growing at an unprecedented level. It made analysts believe that Islamic hedge funds may soon become a reality. Despite the stricter regulations in the Muslim world, Islamic finance companies are optimistic that they can manage hedge fund businesses efficiently.

Islamic law forbids short selling because it involves the sale of something that is not owned by somebody. However, hedge fund managers can still adopt some of the accepted Islamic finance practices that are similar to conventional hedge fund strategies.

Khaleej Times reports that -

A further development of the hedge fund principle is the 'Salam Sale', where one sells a commodity to a buyer against full up-front payment for delivery at a future date. An investor can hedge downside risk by selling stocks as a Salam Sale, with the same economic result as short-selling, but without the involvement of a borrowing element.

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