Permal launches Shariah-compliant hedge fund
Permal, part of French group Worms & Cie, announced last month that it had launched its first Islamic hedge fund.
The fund is part of the $528 million Alfanar family of Islamic funds it runs with investment management company Sedco, a vehicle of Saudi Arabia's bin Mahfouz family.
The fund, called Alfanar US Equity Hedge Fund, is a growth fund managed by FLA Advisers, a New York-based hedge fund company with about $3.2 billion of assets under management.
Conventional methods of shorting are not allowed in Islamic finance because it is contrary to the Shariah to sell something that you do not own and because most derivative contracts are forbidden on the basis that they do not represent real assets, and involve interest and elements of uncertainty.
In order to circumvent these restrictions the fund has had to devise a Shariah-compliant mechanism to replicate the effects of conventional shorting. The solution is based on the salam contract, a traditional Islamic finance forward sale contract.
A reversed procedure
In Alfanar's Shariah-compliant version, the prime broker buys stock from the hedge fund. The fund enters into a contract with the prime broker to deliver stock at a specified future date, which can be anywhere between t+30 and t+180, and receives the payment for the stock up front on t+0.