In a year characterized by innovation in Islamic finance, Deutsche Bank stands out. A new structure based on the wa’s contract has allowed the bank to introduce novel shariah-compliant asset classes and pay-offs and to make possible most derivatives, such as interest rate swaps, currency swaps and options.
Most existing Islamic hedge funds are unable to meet the requirements of clients seeking an absolute return investment with low volatility and reasonable diversification, being all long/short equity with relatively high volatility. However, Deutsche Bank is now able to arrange a shariah-compliant way of giving investors exposure to hedge funds by investing in liquid shariah-compliant assets. Following this investment, the bank swaps away the client’s return (total return swap) for another return (in Deutsche Bank’s case, a hedge fund return).
The bank thus overcomes some of the traditional limitations of Islamic finance through an investment in another asset combined with a swap. The client achieves a conventional risk/return profile in a shariah-compliant manner, while the structure has no inherent constraints on liquidity: Deutsche Bank’s structure (unlike the Murabaha contract) is not qualified as debt and therefore allows a liquid secondary market.
Deutsche Bank continues to come up with several flagship products based on this technique. The shariah HFRX certificate, a 10-year dollar-denominated certificate tracking the performance of the HFRX Global Hedge Fund Index offers daily liquidity and diversified exposure to a basket of hedge funds aiming to represent the overall hedge fund universe, and is tradable. New hedging techniques have also been developed, including an interest rate swap (or profit rate swap) and a shariah-compliant FX option. The bank has also introduced Islamic and exchange listed versions of CROCI (cash return on capital invested).
According to Geert Bossuyt, Deutsche’s head of retail Islamic finance structuring: “A lot of the new techniques are considered proprietary technology and will be kept in-house.”
