The secret to the success of the shariah-compliant fund of funds we told you about this morning is this man: Shariah Capital Chief Executive Eric Meyer. According to his online profile, Meyer, a practicing Catholic and former hedge fund manager, worked closely with Islamic scholars to develop “sophisticated Web-based software for determining whether specific securities are Shariah compliant.”
Sophisticated is basically code for: he found a loophole.
The new fund of funds has to comply with a set of rules to make sure its shariah-compliant:
- no investing in companies engaged in “vices” like gambling or alcohol
- no short selling
- no investing in firms that rely on interest revenue or that carry a lot of debt
- no taking on debt
So Meyer created a strategy that allows a little wiggle room.
Meyer’s New Canaan-based Shariah Capital team designed a contract that is equivalent to short selling. They treat the fee that is usually acquired when borrowing a stock like a down payment on a security they plan to purchase later.
Shariah-compliant consumers already use a similar concept when they buy cars and houses and it’s known as an “arboon” contract in Arabic.
It’s working well for the fund. They killed it last year; they were up 41%.
Here’s a little more on their investment strategy:
It’s based on the expectation that the Islamic-finance market will increase 20%-40% annually over the next several years.
There is definitely growth in this area. A year ago, Islamic banks around the Arabian Peninsula were hooked on construction and financing properties, Ahmed Bin Sulayem, the executive chairman of Dubai Multi Commodity centre (an agency that owns a 51% stake in DSAM) told the Wall Street Journal.
“Right now, they are doing the opposite. They are not touching anything in properties.”
The banks have recently started or increased their asset management divisions after real estate prices collapsed.
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