Key Trends in Islamic Hedge Funds (February 2020)


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 funds ended the year 2019 with its strongest performance since 2009. The Eurekahedge Islamic Fund Index was up 10.09%, supported by the robust performance of global equity markets as represented by the Dow Jones Islamic Index and the MSCI World Index which gained 28.96% and 23.49% respectively over the same period. The positive progress of the US-China trade negotiation combined with the dovish stance of the major central banks acted as tailwinds to the performance of the risk assets throughout the year. After a couple of setbacks in the US-China trade negotiations which triggered global stock sell-offs in May and August, the two-leading economies finally agreed on a phase-one deal in October. The said agreement was officially signed in January 2020. In addition, the accommodative monetary policies of major central banks, particularly the Federal Reserve and the People’s Bank of China, contributed to the performance of risk assets in 2019. Despite the encouraging geopolitical development, the Asia Pacific Islamic funds only gained 7.74% in 2019, underperforming their peers investing globally, which generated 15.57% return over the year.

Figure 1: Industry growth over the years

Figure 1 shows the industry growth of Islamic funds since 2007 with its assets under management (AUM) currently standing at US$102.2 billion overseen by a total number of 858 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.

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1MSCI AC World Index All Cap (Local)