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2018 Overview: Key Trends in Islamic Hedge Funds


The Islamic finance industry is a niche market predominantly serving the needs of the world’s Muslim population. Products marketed under the umbrella of Islamic finance comply with a different investment philosophy as opposed to traditional investment philosophy which the rest of the world are familiar with. Under a Shariah-compliant framework, transactions which are considered to be unethical under Islamic law are prohibited and instead, fund managers invest in products which are compliant with Islamic guidelines. Islamic financial products are accessible to all investors, some of whom choose to allocate into Islamic funds for purposes of portfolio diversification or their preference in investing in products which deemed as socially responsible. In recent years, Islamic finance has been catching on with traditional finance institutions as international banks have expanded into providing Islamic finance services. As the use of derivatives, options and futures are deemed to be speculative; Shariah-compliant products tend to exclude their use, thus making the structure of Islamic finance products different from those found in conventional finance. Though appearing to be esoteric, Islamic finance has been garnering the attention of the broader global investment community as attempts at harmonising the difference between conventional and Islamic finance offers both familiarity and stability to participants of Islamic finance.

Islamic fund industry ended the year 2018 with its weakest performance since the global financial crisis. The Eurekahedge Islamic Fund Index was down 4.83%, still outperforming the Dow Jones Islamic World Index and MSCI World IMI Index which posted 8.36% and 14.94% losses respectively over the same period. Asia Pacific Islamic funds posted the steepest losses among its regional peers as several headwinds, particularly the escalation of the US-China trade war and slowing growth of the Chinese economy plagued the region. As a result, only a quarter of the Asia Pacific Islamic funds managed to end the year in the positive territory. Meanwhile, the Middle East/Africa Islamic funds focusing on the home of the world’s largest oil exporting countries generated the best performance during the year. Crude oil price strengthened when the US President Donald Trump imposed an economic sanction on Iran, which is one of the top oil producers in the world over its alleged missile development and support for terrorism. As a result, oil price rallied to the level last seen before the crash of 2015.

Industry growth

Figure 1 shows the industry growth of Islamic funds since 2007 with its assets under management (AUM) currently standing at US$94.0 billion overseen by a total number of 860 funds. The conservative approach of Islamic finance investing has worked in their favour in some cases. The 2008 financial crisis which had its epicentre in speculative and highly-leveraged investments is one such instance where Islamic funds have managed to avoid the repercussions of the collapse of asset prices. The Eurekahedge Islamic Fund Index fell only 26.61% in 2008, compared to the MSCI World Index1 which plummeted 41.12%. Growth picked up in the following year as equity markets began to recover, and the number of Islamic funds peaked around 2013 and 2014 before showing a trend of decline.

Figure 1: Industry growth over the years

Assets under management of the Islamic fund industry slumped in the second half of 2015 following the crash in oil prices. The slow economic growth of Asia Pacific countries in 2015 and 2016 made it difficult for the Islamic fund industry to recover from this recess. It wasn’t until the latter half of 2017 that Islamic funds managed to bounce back above their previous peak AUM in June 2014, propelled by the recovery in oil prices thanks to OPEC production cut and equity market rallies in Asia Pacific countries. Over the first half of 2018, the industry’s asset under management reached a peak of US$98.3 billion supported by the continuation of the 2017’s global equity rally and recovering oil price. However, the industry asset under management had declined by the end of 2018 as a result of several economic headwinds which hit the industry. Meanwhile, fund launch activities remained muted since 2013, resulting in a stagnating industry population size over the recent years.

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1MSCI AC World Index All Cap (Local)