The literature discusses Islamic investment funds and hedge funds as isolated issues. At present not much work is known, comparing these two very prominent alternative investment forms. This thesis attempts to fill this gap by providing a first insight into both and also tries to answer the following question: Can Islamic investment funds catch up with hedge funds? For this, the thesis compares Islamic investment funds and hedge funds on the basis of different factors, trying to answer three sub questions: What are the advantages and disadvantages of each? Are there differences and/or similarities between the two? How can an investment portfolio including both be balanced?
As will be seen throughout the thesis, Islamic investment funds provide a handfull of advantages over hedge funds, even enabling the former to outperform the latter.
Hedge funds rely mainly on gaining advantage through market inefficiencies, hedging the market risk through short-term opportunities. This construction puts the fund manager into a high risk position with high profit potential. Despite investment restrictions under Islamic law, a fund manager is not prohibited from facilitating hedge funds by these restrictions. The main difference is that Islamic investments offer more risk control by cooperative arrangements. This characteristic enables an investor to cover the risk of hedge funds by investing in Islamic investment funds. Nevertheless, such differences raise the issue of whether it is sensible to invest solely in Islamic investment funds or hedge funds.
[...]
Table of Contents
1. Introduction
1.1 Background
1.2 Statement of the problem
1.3 Objectives
1.4 Justification
1.5 Structure
2. Islamic investment funds
2.1 What are Islamic investment funds?
2.1.1 The Shariah
2.1.2 The principles of Shariah
2.1.3 The Shariah board
2.2 Historic and future development
2.2.1 Financing in the beginning of Islam
2.2.2 Islamisation of the economy – Pakistan in its outrider role
2.2.3 The history of the Islamic capital market
2.2.4 Current market environment of Islamic capital market
2.2.5 Further development of Islamic capital markets
2.3 Special characteristics of Islamic finance
2.3.1 Interest in Islamic finance
2.3.2 Risk in Islamic economics
2.3.3 Gharar
2.4 Financial engineering in Islamic finance
2.4.1 Principles of financial engineering
2.4.2 Strategies for product development
2.5 Special characteristics of Islamic investment funds
2.5.1 Shariah principles for Islamic investment funds
2.5.2 Investing in shares
2.5.3 The purification
2.6 Regulation of Islamic investment funds
2.6.1 Difficulties of adopting existing regulations
2.6.2 Unifying regulations
2.6.3 Information disclosure
2.6.4 The Shariah board
2.7 Vehicles of Islamic finance
2.7.1 Murabaha (cost plus financing)
2.7.2 Bai muajjall (deferred payment)
2.7.3 Bai salam (prepaid purchases)
2.7.4 Istisna (manufacturing contracts)
2.7.5 Mudarabah (partnership)
2.7.6 Musharakah (profit and loss sharing)
2.7.7 Ijara (leasing)
2.7.8 Quard hassan (benevolent loans)
2.7.9 Sukuk
2.7.10 Sale and buy back agreement
2.7.11 Islamic accepted bills
2.7.12 Government investment issues
2.7.13 Islamic treasury bills
2.7.14 Islamic negotiable certificates of deposit
2.7.15 Islamic private debt securities
2.7.16 Al rahnu agreement-I
2.8 Principles of Islamic financing techniques
2.8.1 Nature of financing
2.8.2 Role of the investor in the management and use of funds
2.8.3 Risk bearing by the investor
2.8.4 Uncertainty of the rate of return on capital for the investor
2.8.5 Cost of capital for the fund manager/finance user
2.8.6 Relationship between cost of capital and the rate of return on capital
2.9 Types of Islamic investment funds
2.9.1 Islamic equity funds
2.9.2 Ijara funds
2.9.3 Islamic commodity funds
2.9.4 Murabaha funds
2.9.5 Bai-al-dain
2.9.6 Mixed funds
2.9.7 Islamic investment funds companies
2.10 Islamic investment fund databases and indexes
3. Hedge funds
3.1 What are hedge funds?
3.1.1 Historic and future development
3.1.2 Special characteristics and objectives of hedge funds
3.2 What is the difference between hedge funds and alternative investments?
3.2.1 Returns and the role of the hedge fund manager
3.2.2 Risk and regulation
3.2.3 Investment instruments and trading techniques
3.2.4 Incentives and payment structures
3.3 What are the strategies of a hedge fund manager?
3.3.1 Global macro
3.3.2 Event driven
3.3.3 Equity hedge
3.3.4 Relative value
3.3.5 Short selling
3.4 Style drift
3.5 Investing in hedge funds
3.5.1 The alpha factor
3.5.2 Key determinants of return and risk
3.5.3 The hedge fund manager – a crucial driver for return
3.5.4 The life cycle of a hedge fund strategy
3.6 Hedge fund trends
3.7 The opportunities and risks of hedge funds
3.8 Further development of hedge funds
3.8.1 Hedge fund databases and indexes
3.8.2 Performances in comparison
3.8.3 Concerns in performance measurement
3.9 Fund of hedge funds
4. Islamic investment fund as an alternative investment
4.1 Can Islamic investment funds catch up with conventional investment funds?
4.1.1 How costly is Shariah compliant investment
4.1.2 Advantages of Islamic investment funds
4.1.3 What are the barriers to growth?
4.1.4 Conclusion: Can Islamic investment funds catch up with conventional investment funds?
4.2 Is hedging for Islamic investments possible?
4.2.1 Hedging in Islamic finance
4.2.2 Futures
4.2.3 Options
4.2.4 Swaps
4.2.5 Islamic venture finance
4.2.6 Conclusion: Is hedging for Islamic investments possible at all?
4.3 Can Islamic investment funds appeal to Non-Muslims?
4.3.1 Islamic investment funds’ spread to the world
4.3.2 The problem of the brand “Islamic investment funds”
4.3.3 Conclusion: Can Islamic investment funds appeal to Non-Muslims?
4.4 How to balance an investment portfolio with Islamic investment funds and hedge funds
4.4.1 Advantages and disadvantages
4.4.2 Balancing the portfolio
5. Conclusion
Objectives and Topics
This thesis aims to bridge the gap in existing literature by comparing Islamic investment funds with hedge funds. The primary research question explores whether Islamic investment funds can catch up with hedge funds and how a balanced investment portfolio can integrate both types of alternative investments effectively.
- Comparison of advantages and disadvantages of Islamic investment funds and hedge funds.
- Analysis of similarities and differences between the two investment forms.
- Strategies for balancing an investment portfolio containing both Islamic and hedge funds.
- Investigation into whether Islamic investment funds can appeal to non-Muslim investors.
- Evaluation of potential synergies and risk-control mechanisms in combined portfolios.
Auszug aus dem Buch
2.1.1 The Shariah
The Shariah is translated as “the path to the source of water” and concerns theology, practice and legal matters. It means, it is the “source of life for Muslims” and represents the “clear and correct path that one must follow in life so as to be submitting to the will of God”. The Shariah includes laws derived from revelation, wisdom, and consensus and analogy. It is based on six sources:
o The Quran
o The Sunna
o The Hadith
o Ijma
o Qiyas
o Ijtihad
In the Quran, the Prophet Muhammad received the word of God over a period of time (revelation). The Sunna consists of “practices and sayings”, in overall the behavior of the Prophet Muhammad (wisdom). They then built a standard set of behavior for Muslims, which was passed on as a “collection of traditions”, also known as Hadith. Ijma relates to the decisions derived from religious sources taken by religious scholars on issues not faced by the Prophet in his lifetime. Qiyas refers to the decisions taken by analogy on matters not addressed to in the Quran or the Sunna compared with a matter addressed in the Quran or the Sunna.
Summary of Chapters
1. Introduction: This chapter defines alternative investments and hedge funds, outlines the historical emergence of both, and states the objectives, justification, and structure of the thesis.
2. Islamic investment funds: This chapter covers the definition, history, and special characteristics of Islamic finance, including its principles, financial engineering strategies, and the specific vehicles and types of Islamic investment funds.
3. Hedge funds: This chapter defines hedge funds, describes their historical development, management strategies, risk factors, regulation issues, and current trends in the hedge fund industry.
4. Islamic investment fund as an alternative investment: This chapter answers the main research questions by analyzing whether Islamic funds can compete with conventional alternatives, explores hedging possibilities, examines the appeal to non-Muslims, and provides a framework for portfolio balancing.
5. Conclusion: This chapter synthesizes the main findings, confirms that Islamic investment funds are a viable alternative, and addresses the remaining challenges for their global expansion.
Keywords
Islamic finance, Hedge funds, Shariah, Investment funds, Alternative investments, Risk management, Portfolio balancing, Islamic banking, Murabaha, Mudarabah, Musharakah, Sukuk, Ethical investments, Financial engineering, Capital markets
Frequently Asked Questions
What is the core subject of this thesis?
The thesis examines the comparison between Islamic investment funds and hedge funds, evaluating their respective characteristics and potential for integration into a balanced investment portfolio.
What are the central thematic fields?
The core themes include the principles of Islamic Shariah in finance, the mechanics and strategies of hedge funds, regulatory challenges, and the potential for synergy between these two distinct investment classes.
What is the primary objective of the research?
The primary goal is to determine if Islamic investment funds can perform competitively against hedge funds and to identify ways to create a balanced investment portfolio that leverages both.
Which scientific methodology is applied?
The authors use a literature-based analysis of Islamic finance concepts and hedge fund operations, comparing them based on factors such as risk-sharing, return potential, transparency, and compliance with ethical standards.
What topics are covered in the main section?
The main sections discuss the foundational principles of Shariah, various Islamic financing techniques (e.g., Murabaha, Mudarabah, Ijara), hedge fund trading strategies (e.g., Global Macro, Event Driven), and the regulatory and market trends relevant to both sectors.
Which keywords characterize this work?
Key terms include Shariah-compliant investment, hedge fund strategies, risk-sharing, alternative investment vehicles, portfolio optimization, and Islamic capital markets.
How do Islamic investment funds handle the prohibition of interest (Riba)?
They avoid interest by replacing debt-based financing with asset-backed, profit-and-loss sharing contracts, ensuring that all investments are linked to tangible economic activities rather than speculative interest accrual.
What role does the Shariah board play in an Islamic investment fund?
The Shariah board is an independent body that monitors and approves the bank’s or fund’s operations, ensuring that all financial products and investments strictly comply with Islamic law.
Why is due diligence particularly critical for hedge funds?
Due diligence is vital because hedge funds are often opaque, rely heavily on individual manager skill (the "alpha factor"), and are typically exempt from standard disclosure requirements, increasing the risk of moral hazard and mismanagement.
- Quote paper
- Mag.rer.soc.oec Adnan Siddiqi (Author), Peter Hrubi (Author), 2008, Islamic investments funds versus hedge Funds, Munich, GRIN Verlag, https://www.grin.com/document/114432
