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Access to Islamic Hedge Funds



The tremendous growth of Islamic finance has generated innovative investment...

The tremendous growth of Islamic finance has generated innovative investment
products. As the Islamic marketplace grows in sophistication, investors are
beginning to expect more than the traditional returns offered by real estate and
commodity funds. Hedge funds could be the answer. Published by Hedge funds Review in association with Barclays Capital.



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Access to Islamic Hedge Funds Document Transcript

  • 1. November 2008 l Access to Islamic Hedge Funds Supplement The voice of The alTernaTive invesTmenT indusTry In association with Access to Islamic Hedge Funds CHAlleNgeS to SettINg up dmCC ACCeSS to Al SAFI FuNd proFIleS Islamic investors are eager to access Three hedge funds are operating from Running a Shariah compliant hedge Dubai Multi Commodities Centre is seeding Shariah compliant the Al Safi platform. fund presents some five funds on the Al hedge funds and A wide range of challenges. The Al Safi platform, putting fund managers are long/short funds Safi platform may its seal of approval keen not to sacrifice are hoping to join have the solution. on the project. strategy and them in the 6 13 15 return. 18 near future.
  • 2. access to islamic hedge funds Contents 4–5 Introduction to Shariah Editor Margie Lindsay The tremendous growth of Islamic finance has generated innovative investment products. As the +44 (0)20 7484 9889 Islamic marketplace grows in sophistication, investors are beginning to expect more than the margie.lindsay@incisivemedia.com traditional returns offered by real estate and commodity funds. Hedge funds could be the answer. US Editor 6–7 Challenges to setting up Kris Devasabai +44 (0)20 7484 9748 Running a Shariah hedge fund is a daunting task. Many issues, particularly ensuring the underlying kris.devasabai@incisivemedia.com stocks traded are all compliant, has scuppered attempts in the past. The Al Safi platform thinks it may Production have the answers that will be able to provide ethical Islamic investors with an acceptable product. Amanda Allen 8–9 Al Safi Trust Platform Publisher Scepticism among some Islamic scholars about how to make hedge funds mainstream in the Islamic Jonathan Greene investment community has challenged attempts to set up Shariah compliant funds. The question now +44 (0)20 7484 9867 is whether the Al Safi Trust Platform has addressed those concerns and found a workable solution. jonathan.greene@incisivemedia.com 10–12 Success of Al Safi Advertising Luther Rahman Islamic scholars have long disagreed about the merits of hedge fund investments. Nevertheless +44 (0)20 7968 4514 ethical Islamic investors are keen to tap into the high returns offered by hedge funds. One of luther.rahman@incisivemedia.com the main stumbling blocks has been shorting. The short arboon sale may be an acceptable Advertising production alternative to both scholars and investors. Melanie Law 1–14 DMCC profile +44 (0)20 7316 9837 melanie.law@incisivemedia.com A strategic initiative of the Dubai government created the Dubai Multi Commodities Centre. Now DMCC is playing an active role in seeding the first five hedge funds on the Al Safi Trust Platform. Advertising/editorial fax +44 (0)20 7930 2238 15 Access to Al Safi for investors Managing Director There is growing demand in the Middle East for access to Shariah compliant alternative Matthew Crabbe investments like hedge funds. +44 (0)20 7484 9814 16 Access to Al Safi for hedge funds matthew.crabbe@incisivemedia.com Hedge fund managers are keen to tap into Middle Eastern investors, particularly as sources of new cash Marketing manager is squeezed by the financial downturn. Putting a fund on the Al Safi platform could be a solution. +44 (0)20 7484 9953 claudia.barber@incisivemedia.com 17 Why hedge funds? Head office While hedge funds were originally attractive only to high net worth individuals and family offices, Haymarket House, institutional investors are now eager to take advantage of the higher returns largely uncorrelated 28–29 Haymarket to markets offered by these alternative investments. London SW1Y 4RX 18–19 Fund profile: DSAM Kauthar Gold Fund (Tocqueville Asset Subscription and circulation enquiries Management +44 (0)20 7484 9890 20–21 Fund profile: DSAM Kauthar Energy Fund (Lucas Capital Management) Subscription renewals 22–2 Fund profile: DSAM Kauthar Natural Resources Fund (Zweig-DiMenna +44 (0)20 7484 9896 International Managers) All reports written by Margie Lindsay 24–25 Fund profile: Peconic Partners 26–27 Strategy profile: EnTrust Capital Information on hedge fund managers in Hedge Funds Review is based 28–29 Fund profile: Van Eck Hard Assets 2x Fund (Van Eck Global) solely on information supplied by those managers. The accuracy has 0–2 Fund profile: Caduceus Capital (OrbiMed Advisers) not been verified by Hedge Funds Review. We take no responsibility for –4 Strategy profile: Alkeon Capital Management it. No information in this magazine should be taken as a solicitation 5 Contact details for the Al Safi Trust Platform for investment in any of the investments reported on. © 2008 Incisive Media Group Cover picture: Alhambra, the palace and fortress complex of the Moorish monarchs of Granada in southern Spain, is a reflection of the culture of the last days of the Nasrid emirate of Granada. It is a place where artists and intellectuals took refuge. Alhambra mixes natural elements with manmade ones and is a testament to the skill of Muslim craftsmen of that time. The literal translation, ‘red fortress’, derives from the colour of the red clay of the surroundings of which the fort is made. November 2008 | Access to IslAmIc Hedge Funds supplement |  www.hedgefundsreview.com
  • 3. introduction to shariah Islamic investors eager to access Shariah compliant hedge funds The tremendous growth of Islamic finance has generated innovative investment products. As the Islamic marketplace grows in sophistication, investors are beginning to expect more than the traditional returns offered by real estate and commodity funds. Hedge funds could be the answer. Demand for Islamic financial available from sovereign wealth the Dubai government in the form workable legal solutions with the instruments is expected to increase funds and high net worth individ- of the Dubai Multi Commodities prime broker and eventually the fund rapidly with some estimating that uals in the Middle East and other Centre and its affiliates, believes it administrator. The hedge fund solu- 20% annual growth would not be Islamic countries. has found a solution. tion requires fundamental changes unexceptional. Although some have The problem facing the introduc- One of the reasons few have to the way trades are processed, spe- questioned whether a Shariah com- tion of these products and particu- tried to find a hedge fund solution cifically the contracts underlying the pliant hedge fund was possible, one larly hedge funds has been how to is the development costs (and time) exchange of securities must comply workable solution may have been find a workable solution acceptable involved. The hedge fund solution with Shariah rules. found. to both Shariah scholars and to the goes beyond the usual development Eric Meyer, president, CEO and Shariah funds and Shariah com- investment vehicles. of a financial product because it is executive chairman of Shariah pliant investment are of increasing Some attempts have been made not enough just to structure a fund Capital, is one of the industry’s interest to both global Islamic inves- to find Shariah compliant solutions to be Shariah compliant. It is also most vocal and active champions tors and developed western finan- for hedge funds but up to now, no necessary to ensure compliance of of Shariah compliant solutions. His ciers keen to create products that one has succeeded. Shariah Capital, the hedging strategy, the securities company specialises in custom- will attract the significant sums working with Barclays Capital and held in the investment portfolio and ising Shariah compliant financial 4 | Access to IslAmIc Hedge Funds supplement | November 2008 www.hedgefundsreview.com
  • 4. introduction to shariah products and platforms as well as fund side before the concept will competent legal experts and they Commission] regulations. This was consulting and advisory services be fully understood or embraced. have found a solution that is water- a very lengthy and complicated to global financial institutions and He and Meyer are adamant that tight. Clearly, this could become the process. We first wanted to see it investment companies keen to find the Shariah board, which oversees standard for the funds industry in work with the funds we have on the ways to become Shariah compliant. compliance, is not cutting corners future years,” comments Meyer. platform,” Shaykh Yusuf says. Together with its majority joint or finding trick solutions for com- Initially the platform will only Despite the significant chal- venture partner, Dubai Commodities plicated problems. On the contrary, be accepting hedge funds that lenges faced to get the platform up Asset Management (51%), Shariah Shaykh Yusuf points to the pres- use a long/short strategy. This is and running, the first funds using Capital has set up Dubai Shariah ence on the board (article, page 9) what Meyer describes as the “plain the platform seem pleased with the Asset Management (DSAM). This of members from the Auditing and vanilla”, basic strategy that is the system and there have so far been partnership is responsible for five Accounting Organization of Islamic least difficult to adapt to Shariah no problems. Capacity on the plat- funds which are receiving seed cap- Financial Institutions (AAOIFI), rules. Certain sectors are also rela- form is large and Meyer for one does ital of $50 million from DMCC. which is working to establish tively easy to pass through the Sha- not think there will be any problems Meyer is dismissive of the nay- Islamic finance standards. riah screen. For example, healthcare, adding funds once the significant sayers. He says the ‘first’ of any- “The Shariah board is now a fairly technology, commodities and energy amount of due diligence and paper- thing is always the most difficult. well-established process and people tend to be areas most compatible work is finished. He points to the introduction of are familiar with how it works with Shariah law. “We’re selling into As the learning curve goes up for the sukuk market, which began in and the processes it goes through. a new market so we wanted to keep Islamic investors, Meyer expects Malaysia in 1990 with the small Around 10 years ago AAOIFI was things as specific as we could. If we to see demand for the funds on the issuance of RM120 million ($30 mil- established as the standard-setting start only with equity long/short, platform increase. Judging from lion) by Shell Malaysia and has pro- body for the industry. All the Al Safi that’s fine. We’ll move into techni- the feedback Meyer and others are gressed. The largest issuance size to Shariah board are also members of colour later. We need to start with receiving from roadshows around date is RM10 billion ($2.7 billion) by the AAOIFI board. So you will find the basics first,” explains Meyer. the region detailing Al Safi, Meyer Rantau Abang Capital Berhad. The the broadest possible consensus in “To begin we started working with is confident investors will embrace sukuk market more than doubled in putting products together,” com- Barclays prime brokers in New York the concept and have confidence in 2007 to exceed $60 billion compared ments Shaykh Yusuf. with a set of regulations and the the rigorous application of Shariah with less than $500 million in 2001. He believes scholars need to find SEC [US Securities and Exchange laws to its operation. n He believes there is tremendous consensus answers and that process demand for Shariah compliant does not compromise Islamic princi- hedge funds. Shaykh Yusuf Talal ples. “We have 70%–80% industry ISLAMIC FINANCING MATURES DeLorenzo, chief Shariah officer and acceptance for what we are offering. board member at Shariah Capital and Shariah compliant hedge fund solu- The term ‘Islamic economics’ first appeared in the 1950s and 1960s as also on the Al Safi Shariah board of tions have been tried for four or five research papers, articles and books began to discuss the subject. By the scholars, thinks there is always some years. A couple have launched. So 1970s the first Islamic banks and finance houses were opening in the Middle resistance to new products. it’s not a completely new subject,” East and North Africa (known as the MENA region). Their growth was “There are few alternatives to Al admits Shaykh Yusuf. largely boosted by oil revenues. It was at this point that the first attempts Safi. It is the first platform of its Meyer agrees that the compliance at managing liquidity through commodity murabaha first appeared. Also in kind available to Islamic investors issue will be a big talking point for 1971 Dubai Islamic Bank opened for business. in the Middle East and elsewhere. It some time. However, he believes In the 1980s the numbers of Islamic banks and finance houses blossomed is the most comprehensive and the the quality of the Shariah board for to over 40. Banks at the time put capital into real estate for the long term biggest. Up to the time of its launch the Al Safi platform is outstanding. and murabaha commodities for the short term. there were a lot of sceptics,” he says. “We have done our homework. By the 1990s international banks like Citi and HSBC began offering Shariah- Shaykh Yusuf believes there will We’ve done this the right way. We’ve compliant products. The first industry standards were established by the be a steep learning curve both for been very methodical, with a good Accounting and Auditing Organization for Islamic Financial Institutions. During Islamic investors and on the hedge group of Shariah scholars who are this decade Bahrain and Malaysia emerged as hubs for Islamic finance. In 1994 the first conventional asset managers were invited to manage investments under Shariah supervision and Islamic investing itself expanded MAKING SENSE OF SHARIAH FINANCE TERMS to include leasing funds and a few long-only equity funds. By 1999 Dow Jones had launched its Islamic market indices. By the beginning of the next century Murabaha is a Shariah-compliant sale where the seller expressly mentions and millennium, the number of mutual funds had increased to over 60 and the the cost he has incurred on the commodities to be sold and sells it to another number of Islamic banks operating around the world numbered more than 200. person by adding some profit or mark-up which is known to the buyer. For In 2000 some of the major international law firms established Islamic example, instead of a bank lending money to a customer who wants to buy finance practices and began to compete for market share. In 2001 the a commodity, the bank buys the commodity and sells it to the customer first Shariah-compliant structured products were introduced in the form of for a declared marked-up sum. That way the bank makes money on the principal protected funds and notes. Real estate and leasing funds grew and transaction without it being through interest. the first infrastructure projects were financed under Shariah law. The first sukuk was issued in 2002 by the Malaysia government. Since then Sukuk means a financial certificate in Arabic. A sukuk is a security based the value of these issues has doubled. The following year the first corporate on the securitisation of performing assets that resembles a bond, complying sukuk were issued and the ratings agencies began rating sukuk. In 2006 the with Islamic law prohibiting the charging or paying of interest. first sukuk with US-based corporate assets was issued. Shariah-compliant real estate investment trusts (REITs) and exchange- Sukuk al salam is a form of sukuk based on a salam contract for the traded funds (ETFs) were introduced in 2007. In the UK the treasury delivery of fungible assets. announced it intended to issue sukuks and the London Metal Exchange (LME) reported that $100 billion in Islamic assets were invested. Arboon is a Shariah form of sale contract in which seller and buyer effect a By 2008 Shariah-compliant hedge funds were on the scene and several contract in which a portion of the price is paid in earnest money. The buyer initiatives were launched to try to increase their numbers and investment then has the right to complete the sale within a specified period of time or to flows into them. cancel the contract and forfeit the down payment. Source: Shariah Capital. Source: Shariah Capital. November 2008 | Access to IslAmIc Hedge Funds supplement | 5 www.hedgefundsreview.com
  • 5. challenges to setting up al safi Shariah poses challenges to hedge fund managers Running a Shariah hedge fund is a daunting task. A number of issues, not least of which is ensuring the underlying stocks traded are all compliant, has scuppered attempts to create a solution acceptable for both hedge funds and ethical Islamic investors. The Al Safi platform thinks it may have the answers. Although the demand for Shariah same time allowing funds to continue cial product. It is not enough just to This costs. Few financial institu- compliant products is growing, to pursue the strategies that create structure a fund. It is also necessary tions are willing to take the time and hedge funds have been one of the alpha. to ensure compliance of the hedging spend the money needed to find a last alternative investment vehicles Some investors, unaware of the strategy and the securities held in the workable and sustainable solution. to attempt the daunting task of being variety of strategies available to investment portfolio. Barclays Capital, as prime broker, Shariah compliant. An impressive managers, expect all hedge funds to The hedge fund solution also has made the financial commitment and combined effort of a number of be extremely speculative and there- needs some fundamental changes and seen the potential rewards of companies and factors has produced fore at odds with the Shariah prohi- to the way trades are processed. In stealing a march on competitors what Barclays Capital hopes will be bition of undue speculation. Others particular the contracts that underlie also eager to offer Shariah compliant the blueprint for future Shariah com- think only of short sales and con- the exchange of securities need to hedge funds and related products to pliant hedge fund platforms. clude hedge funds must be prohibited comply with Shariah rules. eager investors. It is not only hedge funds that by Islamic law. These transactions are the pre- In theory at least there should be need to be convinced that the efforts Despite the solution the Al Safi serve of the prime broker. The role nothing controversial about the way at finding a way to comply with Sha- platform presents, it may take some of the prime broker, as well as all the the Al Safi Trust Platform operates riah law are worthwhile. Bankers, time before investors are comfort- regulatory requirements coupled with or invests. The Shariah supervisory investors and many in the media have able, and trusting, enough for this Shariah rules, has daunted many. board insists every aspect of the plat- questioned whether it would ever be to translate into demand for Shariah To find a solution, a prime broker form’s (and individual hedge funds’) possible to find a way to make hedge compliant funds. needs lawyers, internal and external operations are unambiguously com- funds Shariah compliant. Although One of the reasons it has been so counsel, and more than one set of pliant and transparent. The board there are still plenty of sceptics, the difficult to come up with a workable each, to work with Shariah experts, also uses contractual norms estab- Al Safi Trust Platform seems to have solution is simply the development traders and investment managers to lished by the classical jurists of raised the bar on standards, intro- costs. A solution for hedge funds ensure that every step of the process Islam. ducing a relatively fast and easy way goes beyond the usual development is feasible, compliant and, ultimately, The result is a bit of a paradox: an of ensuring compliance while at the costs (and time) needed for a finan- profitable. innovative new hedge fund platform 6 | Access to IslAmIc Hedge Funds supplement | November 2008 www.hedgefundsreview.com
  • 6. challenges to setting up al safi (Al Safi) based on Islam’s ancient used for conventional hedge funds. from that fund other than in a special find unusual is the purification laws using ‘old’ tools to make it work. Another problem the Shariah super- situation, like when a trade in a non- process. Although all the company visory board has to deal with is how a Shariah compliant stock is made. stocks traded are screened for unac- Short arboon manager can temporarily ‘cash out’ of If the fund invests in sectors in ceptable primary business activi- The platform and fund managers a position. The money has to be held which purification often arises – for ties, there are some companies with do not sell what they do not own. in a non-interest bearing account or, if example, retail outlets or REITs – or acceptable primary businesses, like By using a prescribed methodology the term is longer than say, overnight, if it invests in a variety of sectors, the manufacture of spare parts for developed and certified by the Sha- the cash needs to be invested in a Sha- the board will recommend a flat puri- cars for example, that might own or riah supervisory board, hedge funds riah compliant, short-term instrument fication rate of, say, 1.5% be applied engage in unacceptable businesses, implement a Shariah compliant short like a murabahah. to the investor’s net earnings. like the sale of alcohol at company sale equivalent, known as the short If a fund holds stocks that have canteens or restaurants they own Purification arboon sale. This alternative method, especially high revenues from unac- and operate at their factories. which replicates the economic results One potential glitch is what to do ceptable activities (still less than 5%), When the Shariah monitoring of a short sale without using the when a fund accidentally trades an the board has the right to recommend processes show that revenues from borrow-and-sell method of shorting, unacceptable stock. While all com- a higher purification rate. an unacceptable source exceed 5% needed two steps to be possible. panies are screened for unacceptable If a manager or a trader inadvert- of total revenue, then the company First was the creation and certi- primary business activities, a man- ently purchases an unacceptable will be screened out and declared fication by means of a fatwa of a ager may not realise a stock being stock, the board will deliberate and unacceptable for Shariah compliant Shariah compliant short sale method- traded is not on the list until after could recommend an appropriate investments. ology. The second was the modifica- the trade is made. When the Shariah amount to be purified from the fund’s But if the ‘impure’ revenues are tion of prime broker documentation monitoring processes discovers a profits resulting from the oversight. less than 5%, the stock may be held. to replace conventional short sale profit was made from a non-Shariah Investors will be told about all rec- Investors will be responsible for methods with the approved, Shariah compliant stock, a few remedial steps ommendations made by the board on purifying the investment by giving a compliant short sale arboon (article, can be taken. purification through the Al Safi Trust commensurate portion of fund earn- page 12). First, the company will be ‘screened administrator. ings to charities of their choice. The platform also uses an alterna- out’ and declared unacceptable for The Al Safi Trust and hedge fund While different Shariah supervisory tive set of prime brokerage documen- Shariah compliant investments for managers are not responsible for boards have different ways of dealing tation for all trades, whether long or the future. If ‘impure’ revenues from portfolio purification. Investors are. with purification, the Al Safi Trust short. This ensures every trade is the transactions are less than 5%, This way investors can donate purifi- Shariah supervisory board takes a done under Shariah rules: no interest, the stock can be held, but investors cation money to the charities of their practical approach, offering different no prohibited terms and conditions will be responsible for ‘purifying’ the choice. Although the platform will solutions for different managers. and no prohibited operations (like investment. This is done by giving recommend how much should go to Stock dividends is another area the purchase or sale of prohibited an equal proportion of the earnings charity, investors make the final allo- where there are special rules. While businesses such as pork or alcohol to charities chosen by the fund. cations themselves. many Shariah compliant funds cal- production, banks and insurance Different Shariah supervisory culate purification liabilities and then Dealing with cash and purification companies). boards have different ways of dealing pay the them from dividends, this is All managers on the platform are with purification. The Al Safi Trust Clear investment guidelines have not the practice of the Al Safi Trust contractually obligated to execute Shariah supervisory board takes a been given to all the hedge fund man- or its sub-trust managers. There are short sales through Barclays Capital practical approach. It offers different agers on the platform on how to deal three main reasons. Not all stocks prime brokerage. Managers can solutions for different managers. The with cash. Cash is never to be depos- pay dividends. Hedge fund managers initiate long-only trades with other board studies the strategy and sector ited in interest-earning accounts or are active traders of stocks and many brokers, but they need to be settled at concentration(s) of each fund on the instruments. If a manager needed to only occasionally hold stocks long Barclays. platform. If it finds the fund invests “cash out” temporarily a position, the enough to collect dividends. Finally, Shariah compliant contracts allow exclusively in a particular sector in money will be held in a non-interest the Al Safi Trust Platform funds Barclays Capital Prime Brokerage which there is almost never any need bearing account or, if the term is have already been given a purifica- to process trades initiated by hedge for purification, such as healthcare, likely to be longer, invested in a Sha- tion formula by the Shariah supervi- fund managers, avoiding all the pro- technology or telecommunications, riah compliant, short-term instru- sory board. So investors should not hibited elements present in prime then the Shariah board will recom- ment like a murabahah. be troubled by dividends and com- brokerage contracts commonly mend there is no need for purification Another area hedge funds may plex purification formulas. n ESTIMATED GROWTH OF ASSETS/NET ASSET FLOW FATWA APPROVALS EqUITy HEDGE (TOTAL) 1990–q2 2008 Short sale equivalent structure Fatwa relating to arboon structure to effect short sales of securities and long 8,000 7,634 7,601 7,591 Number of funds Hedge funds 7,241 sales and purchases of securities’ Fund of funds 7,000 6,665 Dated 12 Rabi’al Awwal 1426 AH (short sale equivalent fatwa) 5,782 6,000 Option equivalent structure 5,065 Fatwa relating to arboon structure to effect options trading 5,000 4,598 Dated 12 Rabi’al Awwal 1426 AH (options equivalent fatwa) 3,904 4,000 3,335 3,102 2,848 Platform solution 3,000 2,642 2,572 2,564 2,462 2,392 Fatwa relating to Shariah governed equity trading software which will be 2,462 2,006 1,996 2,000 used by Shariah Capital 1,654 1,654 1,277 1,232 Dated 12 Rabi’al Awwal 1426 AH 937 1,000 781 694 550 530 515 538 477 426 389 377 291 237 168 127 Fatwa relating to financial screen for Shariah compliance 0 80 Dated 9 Rajab 1424 AH (Shariah screens fatwa) 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Q1 Q2 08 08 Source: Hedge Fund Research November 2008 | Access to IslAmIc Hedge Funds supplement | 7 www.hedgefundsreview.com
  • 7. al safi trust platform Innovative one-stop solution could lead way for Shariah compliant funds There is a lot of scepticism among Islamic scholars about how to make hedge funds mainstream in the Islamic investment community. One of their major concerns is that hedge funds are perceived as trading in risk to obtain returns through speculation, which is forbidden under Shariah law. Al Safi is an independent, Cayman based Shariah compliant investment the prohibited elements – interest, SEARCH FOR ISLAMIC Islands-based alterative investment product that goes beyond any- prohibited terms, prohibited trans- FINANCING STANDARDS platform designed specifically for thing previously experienced in the actions, prohibited fees – that are Shariah compliant hedge fund strat- Islamic market. present in prime brokerage contracts The Islamic finance industry is egies. Initially the platform will offer For the first time Islamic investors used for conventional hedge funds. rapidly growing and evolving. While commodity and long/short equity have access to sophisticated trading Through a refined Shariah there are still many outstanding hedge fund investment strategies to strategies, world-class managers screening process using proprietary issues – and no doubt there will investors. and a completely new avenue for metrics and software, managers on continue to be as the industry The platform provides what commodity investment. the Al Safi Trust Platform choose evolves – standards are important. Barclays Capital calls a one-stop To ensure compliance, each man- only from a universe of Shariah They give shape to the market solution for investment managers ager is subject to oversight and compliant stocks. and help define the characteristics and investors. All of the prime bro- regular audits by a panel of Shariah Every fund on the Al Safi Trust of the industry as well as kerage, administration and Shariah scholars and all securities are pre- Platform is subject to the same providing the basis for continuing compliance functions are provided screened for Shariah compliance. contractual obligation to invest development, according to Dr on the platform in a turnkey solu- Shorting is accomplished through according to the guidelines estab- Mohamad Nedal Alchaar, secretary tion. a methodology based on a classic lished by the Shariah supervisory general of the Accounting and One of the main issues the plat- transaction known as an arboon board and subject to Shariah over- Auditing Organization for Islamic form deals with is the short selling, and by a set of exclusive prime bro- sight and auditing. Financial Institutions (AAOIFI). which is the bread and butter of kerage agreements that enable an The Al Safi Trust itself is subject AAOIFI is an Islamic international, hedge funds. Perhaps the trickiest arboon sale rather than a borrowing to oversight by a panel of Shariah autonomous, non-for-profit of the Shariah compliance issues, of securities. This replicates the eco- scholars. These scholars oversee all corporate body that prepares the platform has developed not just nomics of a conventional short sale investments made by the hedge fund accounting, auditing, governance, a solution to shorting but also a way (article, page 12). managers. ethics and Shariah standards to ensure the stocks traded by all the All managers on the Al Safi Trust The Shariah supervisory board for Islamic financial institutions hedge funds are Shariah compliant. Platform are contractually obligated has reviewed the structure and the and the industry. Professional Dubai Shariah Asset Management to buy and sell stocks exclusively operations of the Al Safi Trust and qualification programmes are (DSAM) brands and distributes a through Barclays Capital Prime has certified with a fatwa that these supported by the organisation. fund of funds product featuring the Brokerage. The Arboon short sale comply with Shariah. These include the Certified Islamic long/short equity commodity hedge equivalent allows Barclays Capital The Shariah supervisory board Public Accountant (CIPA), the fund managers on Al Safi. Through to process trades by the platform’s has also published investment Shariah advisor and auditor (CSAA) this fund of funds, DSAM offers hedge fund managers in a Shariah guidelines for each hedge fund and the corporate compliance Islamic investors a commodities- compliant manner that avoids all manager and has appointed an programmes. The organisation is supported by 155 members from 40 countries, including central TARGET ASSET CLASSES OF ISSUED ISLAMIC FUNDS banks, Islamic financial institutions and other participants from the 100 international Islamic banking and Other % 9 10 finance industry. 80 14 12 AAOIFI has gained support Private equity and for the implementation of its real estate 20 60 standards. These are now adopted Money market and 45 10 in Bahrain, the Dubai International commodities 40 9 Financial Centre, Jordan, Lebanon, Balanced Qatar, Sudan and Syria. The relevant 5 20 Fixed income authorities in Australia, Indonesia, 40 Malaysia, Pakistan, Saudi Arabia 27 Equity 0 and South Africa have issued guidelines based on AAOIFI’s 2002 2006 standards and pronouncements. Source: Global Insight, Ernst & Young Analysis 8 | Access to IslAmIc Hedge Funds supplement | November 2008 www.hedgefundsreview.com
  • 8. al safi trust platform executive representative to monitor reporting and before the EDGAR be considered is usually corporate on exchanges around the world, on a full-time basis the trades and database (electronic data gathering, debt. This indicates interest and the of which more than two thirds are operations of the platform and each analysis and retrieval of SEC fil- more debt, the more interest paid. Shariah compliant. fund manager. ings) established by the US Securi- Islamic indices measure corpo- Hands-on scholarly input Through daily exception reports ties and Exchange Commission in rate debt in two ways. One divides prepared by Barclays Capital, pur- the late 1990s. total assets by total debt. The other In addition to the screening soft- chases of any stocks not on the Shariah boards that have approved divides market capitalisation by ware, the platform uses a process approved list can be reversed before and supervise the Dow Jones Islamic total debt. involving its Shariah board in the these are cleared for inclusion in a Market Indexes, the FTSE Islamic According to the Shariah super- vetting of stocks for possible inclu- manager’s portfolio. Indexes, the MSCI Barra Islamic visory boards of these indices, if sion in the portfolios of the plat- Indexes, the Standard & Poor’s the ratio of debt/assets or the ratio form’s hedge fund managers. Selecting Shariah compliant stocks Islamic Indexes, and others, believe of market capitalisation/assets is The Shariah advisor may be The stock selection needs to be the screening criteria developed for less than 33%, the stock will pass asked by fund managers about any automated but robust. The Sha- the Al Safi Trust are superior to all through the screens. If it is greater, stock that has been rejected. While riah screening process uses propri- others. This is because the screening the stock will be screened out and hedge fund managers have access etary metrics and software so fund method used by the indices often declared unacceptable for Shariah to the results of screening soft- AD managers are able to choose from throws out good companies as well compliant investments. ware, they can also ask the opinion an expansive universe of stocks. as bad. The board thinks it is only The refined screens used for Al of the Shariah advisor whenever The enhanced screening criteria is a matter of time before the Al Safi Safi do not focus on debt. They they encounter a stock where there stricter from a Shariah standpoint Trust criteria are adopted as the focus directly on what is prohibited: may be questions. For example, the than the present screening criteria industry standard. interest. Debt is not prohibited by manager may have direct access used by well-known Islamic indices. The refined screens developed for Shariah rules. What is prohibited is to information about a company’s Nevertheless, it allows managers to Al Safi hedge funds focus directly the by-product of modern, conven- plans to restructure debt within a choose from a large universe and on what is prohibited. Other tional debt, which is interest. certain period of time, or to liqui- can be added to. screens focused indirectly on these This results in a more refined date a business that disqualifies it The screening process is designed elements. The well-known screens screen that is more exacting for from inclusion, or to merge with a to weed out “unacceptable” compa- begin by considering a company’s companies to pass. Using advanced larger company and become com- nies. It has been designed to accom- primary business and then by scru- software and data feeds, fund man- pliant. This information could affect modate screening criteria developed tinising its financials. agers on the platform have access whether or not a company meets by Shariah boards before electronic The first of the financial items to to 45,000 stocks that are traded Shariah standards. n RENOWNED SCHOLARS FORM AL SAFI SHARIAH SUPERVISORy BOARD Shariah Capital draws on the top Financial Institutions (AAOIFI). the leading authority on Islamic finance and has presented numerous tiers of internationally recognised Sheikh Nizam is an advisor to legal theory and Islamic finance in research papers at industry Shariah scholars to form separate a number of banks and financial Malaysia. conferences. He holds a PhD in Shariah boards for each of its institutions including National A former associate professor Islamic law from Umm Al Qurra projects. This means Shariah scholars Bank of Abu Dhabi, Investcorp, in Islamic law and deputy rector, University in Mecca, Saudi Arabia. work on projects best suited to the Gulf Finance House, Citi Islamic student affairs and disciplines, at Shaykh yusuf Talal DeLorenzo particular areas of their expertise. Investment Bank, Royal Bank of the International Islamic University (US), non-voting executive This process, says Shariah Capital, Canada, Islamic Bank of Britain Malaysia, his areas of specialisation representative ensures the right scholars develop, and European Islamic Investment include Islamic legal theory, Islamic certify and supervise the financial Bank. He is frequently called upon banking and finance and Islamic law Shaykh Yusuf Talal DeLorenzo, the products and services endorsed by to consult with governmental and of zakat. chief Shariah officer at Shariah the company. regulatory authorities on issues Dr Daud is a member of a number Capital, is a scholar of Islamic The scholars on the Al Safi Shariah related to Islamic finance of international Shariah supervisory transactional law. He is the author of Compendium of Legal Opinions supervisory baord is made up of Having taught tafsir, hadith and boards including the Dow Jones on the Operations of Islamic Banks, leading scholars in Islamic finance fiqh in Bahrain since 1976, Sheikh Islamic Market Indexes, HSBC drawn from Bahrain, Malaysia, the Nizam contributes original research (Malaysia), Unicorn Investment the first English/Arabic reference US and UAE. on many aspects of modern Islamic Bank (Bahrain), BNP Paribas, Oasis on the fatwas issued by Shariah finance and is the author of several Asset Management, the Japan Bank boards. Shaykh Yusuf also wrote the Sheikh Nizam yaquby (Bahrain), introduction to Islamic Bonds, the articles and publications published for International Co-operation, the chairman in English and Arabic. He recently Shariah board of AAOIFI and others. 2003 book that introduced sukuk. Sheikh Nizam Yaquby has an participated in the development and His work has appeared in academic Dr Mohammad Abdul Rahim advanced degree in Economics certification of several international and industry journals and as chapters Sultan Al Olama (UAE) and Comparative Religion from sukuk issues. in books. McGill University and has authored Dr Mohammad Abdul Rahim Sultan Shaykh Yusuf was a special Dr Mohd Daud Bakar (Malaysia) numerous fatwa related to innovative Al Olama is a member of the faculty consultant to the Asian Development Shariah-compliant financial products. Dr Mohd Daud Bakar is the of Shariah at UAE University and Bank and the Islamic Development Sheikh Nizam is internationally president/CEO of the International a member of the fatwa committee Bank on their joint project for the known as one of the leading scholars Institute of Islamic Finance and at the department of religious Islamic Financial Services Board. He is of modern Islamic finance. Amanie Business Solutions, a and charitable affairs in Dubai. In a member of the Council of Scholars, He serves on the Shariah consulting company. He is also the addition, he is a member of the board ISRA, Central Bank of Malaysia and supervisory boards of over 40 chairman of the central Shariah of AAOIFI and serves as a member a member of the governing council financial institutions worldwide, advisory council of the Central of the Shariah boards of Mawarid of the International Centre for including several key memberships on Bank of Malaysia and a member of Finance, Manazel Real Estate, Al Education in Islamic Finance (INCEIF) the boards of the Dow Jones Islamic the Shariah advisory council of the Mada’in Finance and others. in Malaysia. Recently, Shaykh Yusuf Market Indexes and the Auditing and Malaysian Securities and Exchange Dr Mohammad has written was appointed a member of AAOIFI’s Accounting Organization of Islamic Commission. He is considered extensively on modern Islamic Shariah board. November 2008 | Access to IslAmIc Hedge Funds supplement | 9 www.hedgefundsreview.com
  • 9. success of al safi Investors keen to find route to Shariah compliant hedge funds Islamic scholars have long disagreed about the merits of hedge fund investments. To many, common hedge fund techniques such as short selling and leverage can never be squared with the principles espoused by Shariah. To others, concepts used successfully in other spheres of Islamic finance such as the sukuk market can be tweaked to make hedge fund investment acceptable. For the past 10 years there have particularly as investors in the The result was the Al Safi Trust compliant offering in October 2005. been various attempts to develop Middle East look for new investment Platform. The name of the solution Only a handful of hedge funds are a Shariah compliant hedge fund opportunities. is indicative of its ambitions. Al Safi currently listed on its platform, investment route to cater for ethical “We started creating the Al Safi means ‘pure’ or ‘clear’. What Bar- including the Al Raed Emerging Islamic sovereign wealth inves- platform 18 months ago because we clays Capital, the investment banking Markets Fund (North of South Cap- tors, pension funds, other institu- saw there was a demand for Shariah side of Barclays Bank, and the Dubai ital), the Old Mutual Al Saqr Fund tional investors and retail investors. compliant alternative investments Multi Commodities Centre Authority (Old Mutual) and the Lucerne Shari’a Several have launched and failed, among Islamic institutional inves- (DMCC), an agency of the Dubai Istithmar Fund (ReachCapital Man- mainly due to the lack of a signifi- tors,” says Frank Gerhard, director government, has created is a Shariah agement). cant sponsor prepared to supply the and head of fund linked derivatives compliant platform for hedge funds. London-based Islamic financial seed capital necessary to create a product strategy at Barclays Capital It committed to seed five commodity services company Amiri Capital profitable platform. Although sev- in London. The request, he says, hedge fund managers on Al Safi with intends to launch a Shariah compliant eral fund-linked derivatives exist, came from the sales group. “They $50 million each, a total of $250 mil- fund of funds within the next few their uptake among the Islamic were looking to expand the Shariah lion for a Shariah compliant fund of months. BNP Paribas is looking to investor community has been slow governed investable universe for cli- funds products to be offered under offer structured products referenced with assets dripping in rather than ents,” confirms Gerhard. the Dubai Shariah Asset Manage- to Shariah compliant hedge funds. flowing. There were some Shariah com- ment (DSAM) brand. Citi is believed to be developing an While significant assets from pliant products, but collectively they Al Safi is a comprehensive Sha- Islamic hedge fund platform. Islamic investors have gone into did not offer wide diversification riah compliant platform comprised Despite these various initiatives, alternative funds and hedge funds, across instruments or portfolios. The initially of single strategy alterna- little progress has been made. How- there is a growing demand for Sha- team at Barclays Capital sat down tive investment managers with Sha- ever, Barclays Capital hopes that as riah compliant hedge funds. With a and the result was the idea to create riah Capital as the Shariah advisor investors become more comfortable, serious alternative to non-Shariah a one-stop-shop solution that would and Barclays Capital as the prime high-profile allocations by entities compliant investing in existence allow hedge funds to carry on with broker and eventually the structured such as the DMCC could persuade through the Al Safi platform, Islamic their lucrative strategies but within product distributor. other Islamic investors to follow suit, investors and institutions can begin a Shariah compliant framework that Barclays Capital was not the first in turn causing assets under man- to diversify portfolios and add alter- did not add unnecessary burdens to to try to find a solution. Newedge, agement to slowly inflate. native investment strategies that the hedge fund or impose punitive jointly owned by Calyon and Société “It is possible that some Islamic conform to the principles and ideals charges on investors. Générale, launched its Shariah institutional investors may wait of the Islamic faith. Factors that in the past restricted TARGET ASSET CLASSES OF SHARIAH COMPLIANT FUND UNIVERSE the growth of Shariah compliant hedge fund investing – such as Proportion of funds targeting asset class (as a % of total) 100 increased fees, restricted investment 10 11 10 Other 18 universe and lack of world-class 29 27 6 26 80 10 Money market managers – have been solved by the 27 13 20 15 Balanced 7 8 Al Safi platform. By tackling these 14 60 10 Fixed income 8 13 7 7 obstacles the Al Safi platform has 1 22 5 Equity 40 opened the floodgates to a new era 67 63 52 of liquid, profitable Shariah com- 54 49 51 20 42 pliant hedge fund investing. While the number of funds signed 0 up to Shariah compliant platforms Global Europe North Middle Asia Shariah Conventional America East Paci c compliant mutual remains small, the prospects for fund fund Shariah compliant funds by geographical mandate universe universe growth are positive. The potential demand for Islamic hedge funds is Source: Eurekahedge Islamic Funds Database, Investment Company Institute, Ernst & Young Analysis huge, say many market observers, 10 | Access to IslAmIc Hedge Funds supplement | November 2008 www.hedgefundsreview.com
  • 10. success of al safi number of enquiries are coming it’s also good to have the lead with TyPICAL ASSET ALLOCATIONS from equity long short managers,” a reliable, credible and transparent says Gerhard. Shariah solution,” notes Gerhard. Alternatives Fixed income Once investors and hedge fund The future of the platform is hard Equity Real estate managers have been introduced to predict. While Gerhard believes its Cash/Deposits 20% to the notion of Al Safi as a “new capacity is huge, it is also necessary 15% 10% Allocation across the instrument”, the feedback from them to start small and grow. “We need to private equity and real Limited investment in Exposure to cash/deposits estate asset classes but real estate and xed inc largely is extremely positive. “Once man- walk before we can run. We’re still focused internationally through balanced funds 30% 5% 15% agers appreciate the concept they are in the ramping-up phase of the plat- 80% keen. They see the platform as a sen- form. We are getting the initial funds Cash/deposits allocations >5% required to meet short- sible way of approaching the chal- up and running and broadening dis- >5% term obligations 60% 60% lenge of delivering Shariah governed cussions with seed investors. As we hedge funds,” Gerhard notes. grow the platform, we need to make Typical Middle Eastern investors sure the funds and infrastructure already have significant experience stay within the Shariah requirements Equities dominate in alternative investments so they are and that we are offering more and asset allocation due to ease-of-access and Equity allocation split familiar with the concept of hedge more diversification across man- Regional listed equities availability through between local and dominate allocation mutual funds international funds. “At the moment we are seeing agers. Then we can branch out into HNWI/UHNWI Mass a uent investors a very strong move towards Shariah structured products where we may Takaful operators governed solutions. If we can pro- address the need for cash substitutes Source: Industry Interviews, Ernst & Young Analysis vide generally attractive returns in and introduce derivative instruments. the Shariah space compared with That’s very much stages three and until they see others getting involved could become a standard for future non-Shariah, there is appetite. But four, after diversification is achieved.” before they start investing in hedge Shariah compliant hedge fund plat- we have to offer both: attractive Addressing what some may see funds themselves,” notes Shaykh forms and products. returns and a credible solution,” as a delay in launching more funds Yusuf Talal DeLorenzo, the chief According to Gerhard, roadshows declares Gerhard. on the platform, Gerhard answers Shariah officer at Shariah Capital, throughout the region by Barclays Middle Eastern investors are simply. “It is about timing. Actually one of the companies involved with Capital aimed at assessing and already one of the most important our timing was very fortunate. In the Al Safi platform. attracting investor interest in seeding alternative investors globally. The this space returns in commodity and “There is potential for Al Safi more funds has shown “significant high net worth and ultra high net equities have not been encouraging. to attract billions in investment,” interest from corporate treasuries, but worth individuals as well as large By delaying we feel we have given a declares Eric Meyer, chairman and also from banks. We also have some institutional investors and banks better choice, from an investor’s per- chief executive of Shariah Capital. players in the wealth management are interested in alternatives. “We spective,” he says. “Based on this assumption, we have space who are interested in seeding. already see strong interest for the Barclays Capital was also keen to been willing to undergo significant There is interest in using the plat- ethical investment aspect across the ensure the platform did not penalise time and expense to get the platform form as an open architecture means board. Investors are already begin- investors on the fee side or on any right,” he says. of creating and launching their own ning to migrate portfolios to Shariah other economic parameters for The success of Al Safi, Barclays products,” explains Gerhard. compliant vehicles. It depends how choosing a Shariah-governed solu- Capital believes, will come from its Barclays Capital expects to have a much of the allocations they can tion. “It was quite important from entirely different approach, basing its commitment from at least one wealth move and on the ability of a man- the beginning not to have to say to short selling mechanism on the con- manager in the region to go ahead ager to generate returns in the Sha- an investor choose one or the other. cept of arboon. An arboon contract and start seeding funds, probably riah compliant space. We see Al Safi Ethical investors are also seeking entitles the investor to purchase an by the end of 2008. The investment, as providing a solid environment for returns. It won’t work if the eco- asset at an agreed price at any time although relatively small at the start, Shariah governed hedge funds,” con- nomics are not right. The solution up to the maturity of the contract. is expected to overtake the $250 mil- cludes Gerhard. has to be sustainable. There is no The investor provides a deposit to lion seed captial put up by DMCC. question in our minds regarding Having the competitive edge the counterparty, which is forfeited Gerhard believes there was initial this,” he declares. if the investor decides not to proceed scepticism about the idea. However, Gerhard believes Barclays Capital Looking at the platform, Gerhard with the purchase (article, page 12). once investors understand the detail through Al Safi has a competitive sees success in simply getting the “With the capital support of a of the operation and how Barclays edge. He points to the months of project up and working. He says sovereign government and the prime Capital through DSAM ensures Sha- negotiation needed to hammer out they are at the beginning of the broker and structuring expertise of riah compliance, they are keen to prime brokerage documentation that process. “On the one hand we are Barclays Capital, the Al Safi Trust become involved. Barclays Capital was acceptable not only to the bank very pleased and thrilled that we’ve Platform is a historic development has also made a significant invest- but also to the Shariah scholars. got the pilot off to such a good start that unites modern investment strat- ment in both time and money – as “Yes, the arboon structure has been where other competitors have failed. egies with Shariah,” adds Meyer. well as in part staking its reputation available for five or seven years as a We are enjoying that,” says Gerhard. David Rutledge, chief executive on the success of the platform – in theoretical solution to this specfic “We have had very positive feed- of DMCC, agrees. “It [the platform] providing its prime brokerage serv- problem. But implementation and back from the industry. Over time enables us to access exceptional ices to the platform. delivery was the challenging part. We we will provide further innovations managers with strong track records He points to the blue chip fund had to make sure it met all the require- available within the same rigorous in order to achieve our goal of deliv- managers the platform is attracting. ments to provide a proper arboon scrutiny. But at the moment we want ering diversified exposure across a “There is real appetite from invest- structure and that we could imple- to make sure the confidence of inves- range of commodity sectors to both ment managers to find a way to ment the solution reliably in the prime tors in this product is justified; that institutional and individual inves- access the alternative investment services context,” Gerhard says. they see a transparent platform that tors interested in Shariah compliant space in the Middle Eastern region. Having now found a solution, is guided by Shariah principles. Time investment products and solutions.” Multi-billion funds with an average he says Barclays may have a small will tell if the platform becomes the While there is still a lot of scepti- size of $2–$3 billion in assets under window where it will lead the market. Shariah standard. At the moment cism, not least from the media, those management (AUM) are approaching But he also believes “it is important we want to give the market a trans- involved in the Al Safi platform are us and want to market themselves to have competitors in the market. It parent, credible solution,” concludes convinced the solution it presents through the platform. The largest helps make the market efficient. But Gerhard. n November 2008 | Access to IslAmIc Hedge Funds supplement | 11 www.hedgefundsreview.com
  • 11. success of al safi Prime broker agreement is key to Shariah-compliant short selling A long/short hedge fund strategy is the plain vanilla of the industry. Finding a Shariah-compliant way to achieve the same strategy is at the heart of the Al Safi hedge fund platform. Finding a workable solution was a complex task. Short selling is not new. It dates use classical transactional models the borrowing-to-sell method of price has to be paid (the closing from 1609 when Dutch trader Isaac like salam and arboon to provide shorting used by conventional date). This complies with the condi- Le Maire performed the first short. investment managers with effective prime brokerages for hedge funds. tion stipulated by the Fiqh Academy His outrageous act led to the first tools for hedging and managing A complex transactional process (OIC), an international body of Sha- stock exchange regulations: a ban risk, including an ability to profit using arboon short sale is needed riah compliant scholars, that a time on short selling, revoked in 1611. from falling share prices. to achieve the same economic result period for payment of the remaining Today short selling is one of the (and profit) as a conventional short purchase price must be stated. Fatwa key to approval most popular techniques used by sale. Different Shariah, regulatory, If the investment manager decides hedge funds to protect and, hope- Formal approval and certification by legal and commercial elements are not to complete the sale, he returns fully, increase their investors’ money. means of a fatwa of Shariah com- involved and the legal documenta- the shares and forfeits the arboon The majority of shorting is a way pliant short sale methodology is key tion is extensive. earnest money. to ‘hedge’ a long position on a par- to the Shariah compliant short sale No matter how willing a hedge Once the investment manager ticular stock. alternative. A fatwa has been issued fund manager may be to comply has made a down payment equal to The idea is that a short seller can for the Al Safi platform and its var- with the investment guidelines speci- a margin account deposit, it is pos- profit from a stock price going down ious solutions, including the arboon fied by a Shariah supervisory board, sible to arrange through the prime by borrowing a security and selling short sale, by a Shariah supervisory it would not be enough. This is broker to sell the stocks bought by it, expecting it will be cheaper to board of internationally renowned because a hedge fund manager does means of the arboon short sale to a repurchase at some point in the scholars. not control the short sale process but third party at the market price when future. When the seller believes the The process used by the hedge depends on the prime broker. the sale is concluded. time is right, or when the lender funds on the Al Safi platform estab- In order to close out the trans- Prime broker role recalls the shares, the seller buys lishes ownership before the sale of action in the arboon short sale, back the shares and returns them to the asset to the market. When an Only a prime broker can provide the investment manager instructs the lender. Al Safi hedge fund wants to short the complicated series of services the prime broker to purchase the Short sellers borrow from brokers, a stock, the trader puts an order required for Shariah compliant short required number of stocks from the who in turn borrow the shares from through Barclays Capital Prime Bro- sale transactions or has the con- market at the market price. Using investors holding the shares ‘long’ kerage. The difference is that on Al tracts that satisfy legal, regulatory, these securities the investment man- (for a number of years). A short Safi the broker facilitates the transac- exchange and prime broker credit ager ends the arboon and the prime seller takes a fundamentally nega- tion as a purchase and not as a loan. and balance sheet requirements. broker retains the earnest money. tive view on a stock, selling high The solution uses an arboon sale, In a Shariah compliant arboon The same process is used in a con- and buying low. rooted in classical Islamic law. This short sale, stocks are bought using an ventional short sale. The technique helps balance the is when a seller takes an arboon or arboon contract. The investor (hedge The arboon short sale solution for market. Short sellers target over- ‘earnest’ money, a non-refundable fund) takes ownership of the stocks. hedge funds goes beyond the usual priced stocks or markets. Hedge down payment or deposit paid by The fund does not borrow the stocks development of a financial product fund managers use shorting as a the buyer to the seller when the sale as in a conventional short sale. because Shariah compliance requires way to protect (or hedge) other long is concluded, with the provision that The arboon short sale uses a sim- more than structuring and moni- positions. the contract is completed within a ilar agreement to ensure the inves- toring a fund to ensure compliance Under Shariah law, however, this set period of time. tor’s ownership of whatever stocks of the hedging strategy and the secu- practice is not permitted. Finding a Although both the salam and are later sold into the market. rities held in the investment portfolio way to replicate the hedging prin- arboon models have been approved The prime broker (in this case by means of screening, investment ciple used by the majority of hedge by Shariah supervisory boards Barclays Capital Prime Brokerage) guidelines, and oversight by a quali- funds was one of the main chal- around the world and are routinely agrees to sell stock to the investment fied Shariah supervisory board. lenges to establishing the Al Safi used by Islamic and multinational manager at the quoted (and agreed) For hedge funds the arboon short platform and other attempts in the banks with Islamic clients, only the market price. The investment man- sale requires fundamental changes past to make hedge funds Shariah Accounting and Auditing Organiza- ager makes an arboon down pay- to the way trades are processed. The compliant. tion of Islamic Financial Institutions ment and assumes ownership of the contracts underlying the exchange The conventional methods for (AAOIFI) and the US Securities stocks. of securities must comply with hedging, and in particular shorting, and Exchange Commission (SEC) The arboon short sale equiva- Shariah rules. Without these modi- are not acceptable in Shariah have found the arboon model suit- lent is structured with a specified fied legal documents, no short sale finance. However, scholars and able for use. “date of ultimate settlement of the solution, however sound its Shariah experts have come to a consensus The arboon short sale replicates purchase and sale”, at which time methodology, can be considered view that it is possible in theory to a conventional short sale without the unpaid portion of the purchase Shariah compliant. n 12 | Access to IslAmIc Hedge Funds supplement | November 2008 www.hedgefundsreview.com
  • 12. dubai multi commodities centre Al Safi is strategic step for Dubai financial services growth A strategic initiative of the Dubai government created the Dubai Multi Commodities Centre tasked with making Dubai a global commodity hub. Established with the objective of prime minister of the UAE and ruler as the business hub of the region. With the seeding of its fourth delivering world-class and special- of Dubai at the launch of DMCC. Part of this strategic initiative is manager, DSAM provides access ised market solutions to the com- Strategically located at the cross- DMCC’s development and manage- both to individual strategies and to modities industry, the Dubai Multi roads of Europe and Asia and with ment of a range of Shariah com- an equally weighted, fund of fund Commodities Centre (DMCC) also is access to large emerging markets, pliant investment products focused solution comprising all DSAM man- providing industry-specific market Dubai has ambitions to become an on commodities through a joint ven- agers. This fund of funds is ideal for infrastructure and a full range of international financial centre, lever- ture initiative between Dubai Com- Islamic investors who want an allo- facilities for the gold and precious aging its considerable expertise and modity Asset Management (DCAM), cation in this asset sector without metals, diamonds and coloured importance within the commodity a wholly owned division of DMCC the complication of choosing one stones, energy and other commodi- sector. It is the first dedicated com- and publicly traded Shariah Capital, commodity exposure over another. ties industries. modities centre in the time zone Inc. The joint venture, Dubai Sha- “Financial engineers have misal- Rated ‘A’ by Standard & Poor’s, between Europe and the Far East. riah Asset Management (DSAM), is located capital. Investing in com- DMCC is a free zone authority Dubai’s financial centre ambitions owned 51% by DCAM and 49% by modity stocks in a non-leveraged, offering tax incentives and other encompass the Gulf states, African Shariah Capital. Shariah manner would return cap- services to encourage investment in countries, the Levant, the Caspian DSAM offers Islamic investors ital investments to the principles of the region and to promote trade. and the former Soviet Union, as well exposure to a range of commodity economic growth and development “We have to make history and as the Indian subcontinent. With a companies, including those engaged rather than trading for its own sake,” approach the future with steady total population of 1.8 billion, this in gold mining, oil and gas, alterna- said Mohammad Jamjoum, DSAM steps – not wait for the future to region’s combined economy totals tive energy, global natural resources general manager, on the launch of come to us,” said His Highness Gen- $1.5 trillion in terms of GDP and is and agriculture through some of the the venture. eral Sheikh Mohammed bin Rashid growing at a rate of over 5% a year. world’s most experienced commodity Access to the individual com- Al Maktoum, vice president and Dubai clearly is positioning itself equity hedge fund managers. modity-linked hedge fund strategies November 2008 | Access to IslAmIc Hedge Funds supplement | 1 www.hedgefundsreview.com
  • 13. dubai multi commodities centre seeded by the DMCC, as well as to compliant funds. DSAM and the Al see what appetite the market has the fund of funds comprising all of Safi Trust Platform also help plug a and then move forward,” comments these strategies, is through various gap in the DMCC’s overall strategy Mohammad Jamjoum. funds offered by DSAM under the to become an international financial “Absolutely, we see additional DSAM Kauthar brand name. centre. “We are certainly the phys- funds. But it has taken a lot of time “This platform has Ian MacDonald, executive director ical market leader for commodities, to put this platform together. There the transparency; for the gold division at DMCC and but we have a gap in financial mar- has to be a lot of due diligence on a board member of DSAM, is also kets,” he says and believes DSAM both sides. A lot of money has it has blue chip highly involved with DSAM and will help bring the physical (com- been invested to get to this delivery the launch of DSAM Kauthar hedge modities) side and financial services point,” points out MacDonald. hedge fund funds through the Al Safi Trust closer together, strengthening the “There is definitely enthusiasm managers. People Platform. offering of both. for Islamic products. We’ve been The Al Safi Trust is a comprehen- “If you look at the local GCC going out and speaking to a lot of are coming to sive, Shariah compliant platform [Gulf Co-operation Council] market potential investors in general in recognise now the primarily for hedge funds. It pro- and listen, there is a crying need for the Middle East. What they need, vides Shariah screening and arboon Islamic investment products. We what they are looking for, are prod- great development sale solutions through Shariah Cap- put our heads together with Shariah ucts. There are very few investment ital, the Shariah advisor, and prime Capital and looked at how we could products that cater to this demand. work we have brokerage through Barclays Capital. address this need and overcome all I think there are a lot of investors done. People were Administration and trustee over- the challenges and barriers. Out of looking for these,” says MacDonald. sight are all within a pre-established the discussion came the joint ven- Even with an economic slowdown, previously thinking, Cayman trust framework. ture with Shariah Capital for an MacDonald says the potential for why don’t hedge MacDonald sees this tying in asset management company cov- investment on a large scale is high. neatly with the mandate of the ering commodity-focused, Shariah He points out that commodities will fund managers come DMCC: to promote trade and compliant investment products,” still be needed in every phase of an industry in the commodity sphere. comments MacDonald. economic cycle. Emerging markets to us, come to the With the first five funds on the plat- MacDonald believes DSAM and will continue to grow and the world Middle East?” form expected to offer a range of the funds it is launching on the will continue to need more commodi- commodities from gold to oil to agri- platform will be taken seriously by ties. MOHAMMAD JAMJOUM, culture, MacDonald believes DSAM investors in the region. He believes As investment demand picks will quickly establish itself as the the forward thinking of the Dubai up, MacDonald believes the Al Safi DSAM market leader in offering Shariah government in the late 1990s when platform will certainly be regarded it committed itself to the commodi- as a credible route into alternative ties centre development, could see a investment and particularly hedge growing need for leadership in this funds. “We are setting the standards area. Few countries were developing with Al Safi and DSAM. That is one policies in the commodity area. of our goals, that is why it has taken DSAM’s adaptation of hedge us so long to set it up. We are aiming funds to be Shariah compliant was for very high levels and if we do more high-profile hedge funds join a perfect next step after DMCC’s not have them, there will not be the the platform, other funds will be “We really like lead. “We have seeded four funds investor confidence in the products. attracted to this route into Shariah so far [with $50 million each]. We That is the key thing. We’ve strug- compliant fund structures. Already commodities as a really like commodities as a cat- gled a long time, we made the deci- DSAM says there are numerous egory and as a strategy. We believe sion to go for the gold standard for enquiries from funds about joining category and as a there is tremendous scope in this this initiative,” declares MacDonald. the platform. strategy. We believe market and that the DSAM Kauthar There are many reasons behind According to Mohammad Jam- funds are best of breed. It will now DSAM’s decision to white-label the joum, there has been excellent feed- there is tremendous be much easier for Islamic investors funds on the platform. One strategic back from institutions to the Al Safi scope in this market to become involved through these reason is the forging of long-term roadshow presentation. He believes funds. It is a logical and pragmatic relationships and alliances with the it is for the simple reason that until and that the DSAM approach,” MacDonald says. partners involved with the platform, now there has never been a truly MacDonald believes there is tre- like Barclays and Shariah Capital. Shariah compliant mechanism to get Kauthar funds are mendous potential in the model He believes it is important with so involved in hedge funds. He believes best of breed. It will of Shariah compliant hedge funds many jurisdictions involved with Al people need and want investment developed through DSAM. While Safi to make sure laws and guide- opportunities that are Shariah com- now be much easier the initial seed capital committed lines of a number of countries are pliant but also offer higher returns. for Islamic investors was an initial $250 million covering respected so the platform can create “This platform has the transpar- five funds, MacDonald says once products acceptable throughout the ency; it has blue chip hedge fund to become involved five funds are seeded it “will not be region. managers. People are coming to rec- the end of the production line. We DSAM is working hard to ensure ognise now the great development through these want to develop a multi-billion dollar investors in the region know about work we have done. People were pre- funds.” world-class industry. Five funds are and understand the investment viously thinking, why don’t hedge just a start. As we push forward opportunity the Al Safi Trust Plat- fund managers come to us, come to there will be other ideas and initia- form offers. Roadshows presenting the Middle East? That’s the feed- IAN MACDONALD, tives, too.” the platform have visited Kuwait, back we were getting. Now we have DMCC Although MacDonald would Qatar, Abu Dhabi and Bahrain four important hedge funds ready not be drawn on future plans, it is already and more are planned. to come and speak to investors. The clear DMCC and DSAM intend to The implicit backing of the Dubai platform’s success proves we have exploit the Al Safi platform. “We government in the project has given done our homework,” concludes are at an initial stage. We need to the project even more credibility. As Mohammad Jamjoum. n 14 | Access to IslAmIc Hedge Funds supplement | November 2008 www.hedgefundsreview.com
  • 14. investor access to al safi Ethical Islamic investors consider Shariah compliant hedge funds There is a growing demand in the Middle East for access to Shariah compliant alternative asset vehicles like hedge funds. Fund managers are keen to attract Middle Eastern investors without sacrificing winning strategies. Ethical Islamic investors want the returns. These investors are turning The Al Safi platform is independ- The fee structure for funds on the assurance that hedge funds offered to hedge funds as a source of sta- ently controlled and built around platform are expected to follow the to them are fully Shariah com- bility and security during market independent service providers. Off- usual 2% management/20% per- pliant and also offer the same type volatility and as a way to diversify shore law firm Walkers Fund Serv- formance fees charged by non-Sha- of returns as generally associated their portfolios. ices (Cayman Islands) is the trustee riah compliant hedge funds. There with this type of investment vehicle: For investors who want a Shariah responsible for the overall man- is no premium charged for Shariah uncorrelated to markets, diversifica- compliant product the Al Safi plat- agement of the platform. Barclays compliance. tion of risk and having a variety of form may offer an answer. Capital acts as prime broker and will The platform is affirmed as Sha- alternative strategies. The Dubai Multi Commodities eventually also provide structured riah compliant by a fatwa issued by Issues surrounding structuring a Centre (DMCC) will manage a range products to Al Safi. Shariah Capital the Shariah supervisory board. This hedge fund can be complex. As more of Shariah compliant investment is the Shariah advisor and Citco fatwa confirms that the proposed Middle Eastern countries develop products focused on commodities, Fund Services (Dublin) acts as fund investment strategies, investment their financial markets and with through a joint venture initiative administrator for all the funds on techniques and expected equity continuing high levels of liquidity, between Dubai Commodity Asset the platform. holdings meet strict Shariah guide- the future looks bright for hedge Management (a wholly owned com- The platform is suitable for insti- lines established by the board. fund managers targeting the Middle pany managed by DMCC) and Sha- tutional and individual investors Shariah Capital, Barclays Cap- East, local start-ups and more insti- riah Capital, a US-based, publicly who want a Shariah compliant abso- ital (prime broker) and Citco (fund tutional players alike. traded company on the Alternative lute return investment. The Shariah administrator) review all the Al Middle Eastern investors have Investment Market (AIM) of the compliant hedge funds are devel- Safi hedge fund accounts on a daily been investing in the conventional London Stock Exchange. The joint oped as a separate white-labelled basis. Barclays Capital generates a hedge fund market for a number of venture, Dubai Shariah Asset Man- product by DSAM and distributed daily exception report that identifies years. Gulf Co-operation Council agement (DSAM), is 51% owned under their own brand names. any trade or security not included in (GCC) institutions have within their by DCAM and 49% by Shariah Access to the strategies seeded the platform’s approved investment own portfolios followed diversifica- Capital. by DMCC are available through universe. If a fund trades a security tion patterns that generally mirror DMCC has provided seeding of new funds offered by DSAM. Invest- that has not been approved, Sha- global investment thinking. $50 million for five funds. DSAM ment into other Al Safi long/short riah Capital contacts the manager Sophisticated Middle Eastern will develop and seed commodity- strategies is expected to be avail- to reverse the trade or eliminate the investors are also attracted by the linked investment products for able eventually through fund-linked position, ideally before settlement. differing investment returns on the distribution in the UAE and other derivatives (structured products Investors should be reassured variety of alternative strategies markets. These new funds are set up offered by Barclays Capital). Once by the solidity of the Shariah proc- when compared to conventional to be fully Shariah compliant, based more funds are operating on the esses, and at the same time they will and regional stock markets, pri- on a strategy and fund structure platform, fund of hedge fund prod- be able to access fund managers vate equity, property and oil-based already run by the fund manager. ucts will also be available. with proven track records. n November 2008 | Access to IslAmIc Hedge Funds supplement | 15 www.hedgefundsreview.com
  • 15. hedge fund access to al safi Middle Eastern investors keen to access hedge fund absolute returns Hedge fund managers facing narrowing sources of investment for their funds are turning to the significant investor base in the Middle East. While many Middle Eastern inves- Funds cannot use leverage or invest To see if a fund strategy is com- seed investment of at least $30 mil- tors are willing to put money into in stocks of companies that have pliant with the platform, the Shariah lion available. conventional hedge funds, a growing excessively high debts or leverage. advisor, prime brokerage and trus- Individual managers of funds number of ethical Islamic investors A hedge fund that uses derivatives, tees first carry out due diligence on using the Al Safi solution are are keen to see Shariah compliant leverage, shorting, margin trading the managers’ standards and suit- relieved from what Barclays Capital hedge funds. The Al Safi platform and option techniques to achieve its ability to be included. This includes calls the “tedious negotiations of may offer some hedge funds a rela- absolute return investment goals a screening of the fund’s portfolio prime brokerage solutions and off- tively easy way to become Shariah will have some challenges. As with holdings, something Shariah Capital shore documentation to ensure Sha- compliant, giving their fund the all Shariah compliant products, a can do in 24 hours. riah governance”. Managers do not reassurance ethical Islamic inves- hedge fund strategy would have to Trust and sub-trust documents have to set up a Shariah certification tors want without disputing the be certified by a recognised Shariah are pre-designed, based on industry framework as that is part of the Al fund’s strategy. scholar via a fatwa. standards for independent offshore Safi solution. Investors are able to There is no doubt there is an Hedge fund managers interested platforms, managed by offshore seed Islamic long/short hedge funds. attractive pool of investment capital in setting up a Shariah compliant external counsel. Little negotiation All the hedge fund management not only in the Gulf Co-operation fund on the Al Safi platform have of documentation is expected to be companies access the platform Council countries but also in the rest a relatively simple solution to what needed, particularly as the docu- through a sub-trust of the Al Safi of the Islamic world. Tapping into may seem insurmountable obsta- mentation is one way to ensure the Trust, domiciled in the Cayman this source of capital has not been cles. The Al Safi platform is being homogeneity of the platform. Islands. The Shariah supervisory easy for hedge funds. presented as a turnkey solution Funds that are accepted set up board, Shariah advisor, trustees Shariah law generally imposes that provides portfolio screening managed accounts. The sub-trust and administrator are all part of the restrictions on types of investment. and related Shariah solutions for opens an account with Barclays package. It requires that Shariah compliant hedge funds. This enables managers Capital, the dedicated prime broker, An initial and annual certification funds avoid transactions in unethical to operate within Shariah while including agreements on custody by the Shariah supervisory board is goods and services; earning returns remaining consistent with their and other related matters. The sub- issued to confirm Shariah govern- from financial instruments (interest); existing investment strategies. trust commits the investment man- ance. There is ongoing monitoring excessive uncertainty in contracts A crucial element is the ability of ager to manage the prime brokerage of Shariah governance by the Sha- (gharar); trade in debt contracts; the fund to short stocks in a Shariah account through an investment man- riah advisor, Shariah Capital. forward foreign exchange con- compliant manner. This has been agement agreement. Al Safi is independently con- tracts; and general forms of finan- solved through the arboon short sale The sub-trust and managed trolled and built around independent cial options and similar derivatives. (article, page 12). account are only set up if there is a service providers. n 16 | Access to IslAmIc Hedge Funds supplement | November 2008 www.hedgefundsreview.com
  • 16. investing in hedge funds Funds offer investment strategies for wide range of market conditions While hedge funds were originally attractive only to a high net worth individuals and family offices, institutional investors are also keen to take advantage of the higher returns uncorrelated to markets that hedge funds represent. Alfred Jones is credited with the crea- traditional markets. The funds can agers have essentially two compo- While there are a plethora of tion of the first hedge fund in 1949. To operate in almost any market. They nents to this performance: the market hedge fund strategies, the most neutralise the effect of overall market can invest long, like a traditional (beta) and excess return versus the common is long/short equity. It is movement, he balanced his portfolio mutual fund, or short, profiting if the benchmark (alpha). certainly considered the largest cat- by buying stocks he expected to rise value of the underlying asset falls. In traditional portfolios, alpha can egory in terms of the numbers of and selling short the ones he thought Although some question whether be generated only by overweighting hedge funds. But even this relatively would drop in price. The effect was to hedge fund managers will be able to stocks considered undervalued within simple and common strategy runs ‘hedge’ part of the risk due to overall continue to produce alpha – returns the benchmark and underweighting into significant problems for any market movements. over and above those on the broad securities considered overvalued. investor applying Shariah principles. The industry has grown rap- market in which they operate, gener- Hedge funds, unlike long-only man- While the conventional long/short idly with an estimated $3 trillion in ated due to the fund manager’s skill in agers whose total returns are domi- strategy is outside the precepts of assets under management. Hedge exploiting inefficiencies in the market nated by benchmark movements, Shariah law, it has taken consider- funds now account for close to half – even those achieving only market can achieve returns independent of able time and money to find a way the trading on the New York and returns (beta) are in high demand. normal market cycles. to match the Shariah principles with London stock exchanges, according The reason is that even a relatively Having an alpha focus, hedge fund the way in which the hedge fund to some sources. poor hedge fund performance is likely strategies try to exploit market inef- strategy operates (article, page 17). Even with the recent market to be better than anything the more ficiencies in a variety of ways. These In the aftermath of the credit instability and financial turmoil, traditional long-only and mutual fund include buying undervalued securi- crisis and the financial market chaos, few believe hedge funds will disap- sector can offer. Even compared with ties and selling overvalued ones at hedge funds are expected to continue pear. On the contrary, this alterna- private equity and real estate funds, the same time, making macro bets or to play an even stronger role in cre- tive investment sector is one of the the returns are potentially high. by relying on tactical trading skills. ating liquidity and making markets fastest growing and most attractive Hedge fund investing is not for the These techniques provide a source of more efficient, according to some to investors, despite a recent spate of faint-hearted. Investors need to under- return different from a portfolio of tra- market observers. Finding ways to redemptions for some strategies. stand the risk they take. Historically ditional market-driven investments. enable hedge funds to operate in a The attractiveness of hedge funds hedge funds offer a unique source of This absence of correlation with Shariah-compliant way will open to investors lies in their generally return drivers that have generated the markets is what many investors this alternative investment vehicle to uncorrelated returns to traditional high risk-adjusted returns with rela- want in order to boost their returns more investors. markets. Returns of many hedge tively low correlations to other assets. on investment. Hedge fund managers for their fund investments are not too closely In traditional asset classes such as Hedge funds started out as a tool part are eager to find ways to modify related to the ups and downs of equities or fixed income, active man- for high net worth individuals to strategies and the way they create boost the performance of their pri- alpha in order to adhere to Shariah vate offices. Now hedge funds are a principles so that investors in the ESTIMATED GROWTH OF ASSETS/NET ASSET FLOW tool for institutional investors, par- Islamic community can take advan- EqUITy HEDGE (TOTAL) 1990–q2 2008 ticularly pension funds and endow- tage of this alternative investment ments, used not only to diversify strategy. 8 portfolios but also to help increase It is also likely that hedge funds 1,931,43 8 9 1,875,70 1,868,41 2,000,000 investment returns. will become more transparent fol- Estimated assets Assets ($MM) Over time hedge fund strategies lowing the financial turmoil of recent Net asset ow 1,750,000 6 tend to exhibit fairly low correlations months. Regulators will be paying 1,464,52 to equities and low or negative cor- more attention to their activities, as 1,500,000 relation to fixed income. It is no sur- will investors, keen to ensure that 5 1,105,38 1,250,000 prise that investors are keen to add operational and counterparty risks, 972,608 hedge funds to a traditional asset for example, are addressed. 1,000,000 820,009 mix to reduce overall volatility and Analysis of operational risks generate better returns. involved with hedge funds includes 625,554 750,000 539,060 Large corporate treasuries are issues such as safe custody of 490,580 456,430 374,770 367,560 500,000 also using alternative investments as assets, pricing policy and checks and 256,720 a diversifier, often together with pro- balances within the investment man- 194,515 14,698 5,750 167,360 36,918 790 126,474 250,000 99,436 27,861 20 tected structured products for large agement company. The assessment 91,431 167, 70,635 8,463 70 18 73,585 46,907 57,407 55,340 38,910 46,545 23,336 95,7 12,515 16,469 58,3 (1,141) 4,406 cash holdings. This is one of the key of credit and market risks is another 0 0 drivers of the significantly increased area investors will want to see man- 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Q1 Q2 08 08 net inflows to hedge funds. aged better in future. n Source: Hedge Fund Research November 2008 | Access to IslAmIc Hedge Funds supplement | 17 www.hedgefundsreview.com
  • 17. fund profile Strong commodity focus dominates first funds chosen for Al Safi Dubai Multi Commodities Centre, an arm of the Dubai government, invested $150 million in three commodity-related hedge funds that will trade commodity equities in compliance with Islamic religious principles. Two more funds are expected to join the first three for a total seed investment of $250 million. Tocqueville strikes gold Three separate funds – managed become part of Dubai Shariah Asset As the first feeder fund, Toc- by Tocqueville Asset Management, Management (DSAM), a joint venture queville Asset Management will The DSAM Kauthar Gold Fund is Zweig-DiMenna International Man- between Shariah Capital and Dubai specialise in gold and precious the first Shariah compliant hedge agers and Lucas Capital Management Commodity Asset Management, metals stocks. Zweig-DiMenna Inter- fund of its kind and the first in a – have each been given $50 million to a wholly owned division of Dubai national Managers will focus on a family of commodity-linked funds make investments that comply with Multi Commodities Centre (DMCC). range of stocks connected to hard offered by DSAM. Shariah law. They will invest in com- The feeder funds will be regis- assets such as coal and steel. Lucas The fund offers Islamic investors modity-related stocks ranging from tered in Cayman and branded under Capital Management will focus on a disciplined exposure to gold and oil to gold and are the first funds to the DSAM Kauthar name. oil and natural gas stocks. precious metal equities through one 18 | Access to IslAmIc Hedge Funds supplement | November 2008 www.hedgefundsreview.com
  • 18. fund profile of the most experienced managers tation helps the portfolio manager among investors is not expected to investment philosophy an ideal in this asset class. find companies that have good busi- improve. Investment ideas come match for the Al Safi platform. Investing exclusively in units of nesses. The contrarian orientation from identifying companies where Although the fund is starting with the Tocqueville Gold Focus Fund, enables the fund to buy these com- stock prices are down or have lagged the seed capital of $50 million, Hath- the DSAM Kauthar Gold Fund is a panies at attractive prices. the market. By analysing the quality away is confident he will be able to sub-trust of the Al Safi Trust man- Value orientated means the port- of the business franchise and long- grow this to $500 million over a two- aged by Tocqueville Asset Man- folio manager looks for companies term fundamentals, the fund can year period. “We have the capacity agement. The fund’s return reflects that are selling at a discount to their make a judgement about the compa- to manage that sort of money and the performance of the Tocqueville intrinsic value and where business ny’s intrinsic value. With a company we believe we are going to be talking Gold Focus Fund. fundamentals are improving or with strong long-term business to investors who are already con- The Tocqueville Gold Focus Fund expected to improve. In assessing fundamentals, the fund can wait vinced of the attractions of gold,” aims to produce positive, absolute intrinsic value, the portfolio man- for them to fall out of favour with says Hathaway. Although he would long-term returns using both long ager’s judgements are based on a investors in order to buy them at a have been wary of approaching and short strategies in gold and pre- comparison of a company’s stock discount to intrinsic value. investors in the Middle East without cious metal equities. It will invest market value with various financial The fund sells stocks when they the support of DSAM and Shariah primarily in the shares of precious parameters, including historical and are no longer considered to be good Capital, he is confident the fund will metal producers. Short selling of projected cash flow, book earnings value. be attractive to regional investors. equities will be used as a defensive and net asset value. Gold is particularly good if an Speaking about tailoring the fund strategy to dampen the volatility of Generally the fund looks for investor wants to diversify its port- to be Shariah compliant, Hathaway gold prices. companies that are characterised folio or wants an investment that says trading is little different for Tocqueville Asset Management by strong management, business may provide protection against him. The Shariah Capital screening is a US-based limited partnership franchise, competitive position and inflation or currency devaluation, criteria are easily accommodated registered as an investment advisor financial structure, a clear strategy, as long as they are also willing to and the eligible universe of Shariah with the US Securities and Exchange free cash flow, large insider owner- accept the additional risks associ- compliant companies allows him to Commission. It is the investment ship and shareholder-orientated ated with investment in gold and manage the DSAM Kauthar Gold manager to the Tocqueville Gold policies. Contrarian means the fund gold-related securities. Fund suimilar to the Tocqueville Focus Fund and to registered invest- is looking for investment opportu- Fund strategy. He expects Shariah Middle East opportunity ment companies, private funds and nities in stocks and sectors that are to be an important part of what separately managed accounts. out of favour with investors. Hathaway sees inclusion on the plat- Tocqueville does in the future, too, Tocqueville has been in the asset Stocks are considered out of form as a real plus for his company and forecasts that the company management business since 1990. favour when the price has declined and the fund. Not only were the could be looking at a quarter of its At June 30, 2008 Tocqueville had significantly or has lagged the rel- majority of the fund’s deals already investors coming from the Middle over $6.5 billion in assets under evant market index for an extended largely Shariah compliant, his aver- East and wanting products like the management. period of time and the consensus sion to leverage and debt made his DSAM Kauthar Gold Fund. n John Hathaway, managing director, a portfolio manager and a member of both the investment FUNDAMENTALS OF DSAM KAUTHAR GOLD FUND committee and the executive com- mittee of Tocqueville, has primary Name of fund: DSAM Kauthar Gold Fund responsibility for management of Management company: Tocqueville Asset Management the fund’s portfolio. Hathaway has 38 years of experience in the invest- Portfolio manager: John Hathaway ment business, including the last 10 Contact: Mohammad Jamjoum, general manager, Dubai Shariah Asset Management, Dubai years with Tocqueville Asset Man- Multi Commodities Centre, Al Mas Tower, 50th Floor, Jumeirah Lakes Towers, Dubai, agement. United Arab Emirates (+971 4375 2227; mjamjoum@shariahcap.com) Hathaway manages discretionary Domicile: Cayman Islands concentrated portfolios for indi- Asset manager: Dubai Shariah Asset Management (DSAM) vidual and institutional clients. As an analyst he is responsible for Fund summary: Offers a disciplined exposure to gold and precious metals equities investing researching the natural resources exclusively in units of the Tocqueville Gold Focus Fund, a sub-trust of the Al Safi Trust sector and special situations. managed by Tocqueville Asset Management. The Tocqueville Gold Focus Fund aims to produce positive, absolute long-term returns using long and short strategies in Fund investment strategy gold and precious metal equities, investing primarily in the shares of precious metal Tocqueville usually invests the producers. It engages in the short selling of such equities as a defensive strategy to majority of its net assets in gold dampen the volatility of gold prices. and securities of companies located Asset manager fee: 1% throughout the world that are Minimum investment: $5 million engaged in mining or processing gold. A proportion of the fund’s Subscriptions: monthly total assets may be invested directly Liquidity: quarterly, with 30 days’ prior written notice, subject to a 3% redemption fee in the in gold bullion. first 12 months The investment strategy of the Auditor: PricewaterhouseCoopers gold fund is value orientated and Administrator: Citco Fund Services contrarian. The fund invests in companies with good long-term Prime broker and custodian: Barclays Capital Shariah advisor: Shariah Capital business fundamentals that are tem- Shariah compliance: The Shariah Supervisory Board of the Al Safi Trust Platform consists of Sheikh Nizam porarily out of favour with inves- Yaquby (Bahrain), Mohamed Daud Bakar (Malaysia), Mohammad Abdul Rahim Sultan tors so have a market value lower Al Olama (Dubai) and Shaykh Yusuf Talal DeLorenzo (US), the board’s executive than their intrinsic value. Funda- representative and Shariah advisor to the fund. mental research-based value orien- November 2008 | Access to IslAmIc Hedge Funds supplement | 19 www.hedgefundsreview.com
  • 19. fund profile Natural resources stock picking focus creates success DSAM Kauthor Natural Resources Fund is one in a family of Shariah compliant commodity related funds offered by Dubai Shariah Asset Management (DSAM) on the Al Safi Trust Platform. Dubai Multi Commodities Centre (DMCC) has invested $50 million seed capital into the fund. The DSAM Kauthor Natural Joseph DiMenna and Martin across the spectrum of natural market risk analytics. Thomas Resources Fund, the third fund oper- Zweig co-founded Zweig-DiMenna resources stocks, an area of special Keyes is also portfolio manager ating on the Al Safi platform, offers Partners in 1984. In 1987 they interest and expertise. for the Zweig-DiMenna Natural investors exposure to the natural started Zweig-DiMenna Interna- Zweig-DiMenna launched its first Resources Fund. He joined the com- resources sector. The fund invests tional, an offshore fund. Zweig and natural resources sector-focused pany in 2001 and is also respon- exclusively in units of the Zweig- DiMenna are seen as pioneers in long/short equity vehicle in 2005. sible for portfolio construction and DiMenna Natural Resources Fund, a long/short equity investing. As head portfolio manager for the research for all the Zweig-DiMenna sub-trust of the Al Safi Trust man- DiMenna is the hands-on head Zweig-DiMenna Natural Resources investment vehicles. His oversight aged by Zweig-DiMenna Interna- portfolio manager for the compa- Fund, DiMenna is responsible for and research in the Zweig-DiMenna tional Managers. Zweig-DiMenna, ny’s investment vehicles. He has a portfolio construction and oversees Natural Resources Fund spans a with assets of around $4 billion, is 25-year track record in long/short stock selection. wide variety of natural resources one of the oldest names in the hedge equity investing. Throughout his Zweig’s 40-plus-year career has stocks. fund industry. career he has actively invested been spent developing and refining Another key member of the 22 | Access to IslAmIc Hedge Funds supplement | November 2008 www.hedgefundsreview.com
  • 20. fund profile investment team is Daniel Altman, the management of the companies stocks is typically six to 12 months. a metals and mining research spe- and visit facilities worldwide. Ana- The average individual stock posi- cialist who joined Zweig-DiMenna lysts also meet with competitors, tion size is in the 1%–2% range in 2007. He has received a number vendors and end-users in the course and there are generally only a few of accolades for his research in the of their research on a company. over 4%. The portfolio is diversi- Zweig-DiMenna’s sector. Detailed analysis of supply-and- fied across a substantial number of research Other investment professionals demand trends in natural resources individual positions for portfolio on the investment team have an in developed and emerging markets flexibility. approach includes average of over 15 years working in is another element of its expertise in Exposure in Zweig-DiMenna’s constructing the hedge fund industry. the sector. In addition, the team uses natural resources sector strategy has Zweig-DiMenna emphasises cutting-edge technology to assist the averaged about 75% net long and detailed financial research, trading, risk management research process. 95% gross long in recent years, but and client service. The company The research team concentrates currently is much lower. The gross models of stocks takes a long-term view of client on identifying specific catalysts for and net investment exposures vary, in the energy, basic relationships. Many of its investors change in a stock price, including driven by a combination of opportu- have been with the company for earnings surprises, product cycle nities and market conditions. materials and over 10 years. Its investor base is changes, technological innova- Risk management is important related sectors. wide including various institutions, tion and regulatory changes. Shifts to Zweig-DiMenna. The company family offices and funds of funds. in supply and demand, driven by takes a two-pronged approach. Investment Throughout Zweig-DiMenna’s changing industrial and economic First, the company has a risk man- history, the focus of the company conditions, are an important factor ager who provides the portfolio professionals has always been on returns rather in the investment decisions. Changes managers with analyses including meet with the than asset growth. in commodity price expectations are gross, net and beta portfolio expo- another important consideration. sures, as well as the concentration, management of the Diversified portfolio Other factors include restructuring correlation and beta of sector expo- companies and visit The DSAM Kauthar Natural and corporate events, as well as sures. Resources Fund’s return reflects the more esoteric concepts, like changes The beta of the individual posi- facilities worldwide. performance of the Zweig-DiMenna in investor psychology. tions is also carefully monitored, as Natural Resources Fund. The port- On the short side, the investment is the liquidity of the positions. Posi- Analysts also meet folio is diversified holding at least team looks for companies where tions are evaluated on an ongoing with competitors, 75 different positions of US and there are fundamentally flawed busi- risk/reward basis and the viability global stocks across various natural ness models, poor earnings quality, of the catalysts that have been iden- vendors and end- resources sub-sectors and across a the inability to generate sufficient tified is carefully scrutinised. users in the course range of market capitalisation. cash flow, aggressive accounting, Geographic exposures are also The Zweig-DiMenna Natural and mis-pricing based on assump- carefully monitored. A variety of of their research on Resources Fund invests in the secu- tions about the underlying com- other risk management tools are rities of companies that own or modity prices. The portfolio always used including BARRA analysis. a company. develop natural resources or energy includes short positions, which are Second, macro-economic risk alternatives as well as companies seen as profit centres. management focuses on interest rate that supply goods and services to Catalysts for change are moni- trends, inflation, investor liquidity, the sector. These include compa- tored continuously. Earnings and global supply and demand, geo- nies involved directly or indirectly price targets are identified and fre- political risks and industry and in exploring, mining, refining, quently revised. The time horizon on market trends. n processing, transporting, fabri- cating, dealing in, or owning natural resources. FUNDAMENTALS OF DSAM KAUTHAR NATURAL RESOURCES FUND Zweig-DiMenna is known as a Name of fund: DSAM Kauthar Natural Resources Fund manager with extensive investing experience in natural resources Management company: Zweig-DiMenna International Managers stocks, using a rigorous, catalyst- Portfolio managers: Joseph DiMenna and Thomas Keyes driven research approach to stock Contact: Mohammad Jamjoum, general manager, Dubai Shariah Asset Management, Dubai selection. Fundamental research Multi Commodities Centre, Al Mas Tower, 50th Floor, Jumeirah Lakes Towers, Dubai, from a global opportunistic perspec- United Arab Emirates (+971-4-375-2227; mjamjoum@shariahcap.com) tive is at the heart of the company’s success. Domicile: Cayman Islands The portfolio is constructed from Asset manager: Dubai Shariah Asset Management (DSAM) the bottom up and decision-making Fund summary: Invests exclusively in units of the Zweig-DiMenna Natural Resources Fund, a sub- is centralised. Ideas come from trust of the Al Safi Trust Platform and is managed by Zweig-DiMenna International both the portfolio managers and Managers. The fund’s return reflects the performance of the Zweig-DiMenna Natural the analysts. The team looks at a Resources Fund account at Barclays Capital. It invests primarily in long/short equity broad universe of stocks, and makes securities with stock selection based on a fundamental bottom-up analysis. The its selections based on in-depth portfolio is generally diversified with at least 75 different stock positions and includes research. US and foreign stocks of natural resources sub-sectors with a range of market cap. The fund may invest in the securities of companies principally engaged in owning or Modelling stocks developing natural resources (or their alternatives), or supplying goods and services Zweig-DiMenna’s research approach to these companies, including entities involved directly or through subsidiaries in includes constructing detailed finan- exploring, mining, refining, processing, transporting, fabricating, dealing in or owning cial models of stocks in the energy, natural resources. basic materials and related sectors. Asset manager fee: 1% Investment professionals meet with November 2008 | Access to IslAmIc Hedge Funds supplement | 2 www.hedgefundsreview.com
  • 21. fund profile Teamwork and robust trading help fund in chaotic market Naming a company after a Native Harnisch began his career at Chase as Peconic Partners, founded in For example, one account may American tribe may seem to some Manhattan Bank in 1968. He joined 2000. The company now has $1.5 only want to trade in copper or a bit eccentric, but to William ‘Bill’ Forstmann-Leff Associates in 1978 billion in assets under management other metal and natural resources. Harnisch, chief investment strate- when the business managed $300 (AUM) in a variety of accounts The system will automatically allo- gist at Peconic Partners, it seemed million. allocated into funds. Long/short cate any trade in those areas to that the perfect solution. The name, he He began managing that company equity accounts for the bulk of busi- account. Harnisch says setting up says comes from a tribe resident in 1984 and became a majority share- ness. Harnisch has set up a system the system to allocate only screened, in east Long Island, described as a holder in 1989. With a strong history where all the trades go through one Shariah compliant trades into a Al wealthy tribe. “I thought it would be in absolute return, Forstmann-Leff ‘clearing’ centre before the assets Safi-based fund would be no dif- nice for a hedge fund. In fact one of entered the hedge fund business in are allocated into different funds or ferent and would not change the way our two disaster recovery centres is 1990, eventually growing assets to managed accounts. “We spent a lot he trades at all. actually in east Long Island,” Har- over $5 billion. The long-only busi- of money on the system, getting the “We’ve set up a good system. A lot nisch says. ness was sold in 1997 and Harnisch background on stock picking right. of money went into the system and Harnisch manages all aspects of left at the end of 2004 to concentrate About 80% of our AUM trade is there has been a lot of research on the company’s investment process. on the hedged product now known long/short,” says Harnisch. the stock picking side, too. We’ll do 24 | Access to IslAmIc Hedge Funds supplement | November 2008 www.hedgefundsreview.com
  • 22. fund profile whatever is needed to make it work the portfolio will have its top-10 long are no positions in emerging markets. as well for Shariah compliant trades ideas making up 40%–50% of the The kinds of companies he takes as for our other accounts,” he says, equities traded in the portfolio. positions on are global. “We pursue noting that at present around 80% of As an example of how he views names, mature companies, and these Peconic has worked all AUM is traded as long/short posi- stocks, he explains his rationale are global. You have to look beyond tions through the existing system. behind how the portfolio traded Best geography.” For example, Nestlé and with almost every Peconic likes to take concentrated Buy. “We were shorting the stock in Unilever have as much business in positions. But, according to Har- 1997. We sold short when it was at the US as their equivalent US cor- major religion and nisch, concentration is in the eye of 45 and it went down to 12.” porations, like General Mills or Kel- been able to cater the beholder. Others may not find his The stock became interesting logg, which likewise have significant positions that concentrated. again to Harnisch when one of operations outside the US. for any of their his themes – a shift from analogue What he looks at is how they A different approach demands on the to digital – was detected. This he measure up against absolute return In general, he believes the fund takes believes was a trend that would and second, if they are beating the investment front. a different approach to fund manage- drive sales business by a significant market average over time. ment than others. There is a heavy amount every year for several years. Investment into the fund is mixed, Harnisch believes stock-picking orientation. “We tend to So he corrected his position and with high net worth individuals, the fund will be develop ideas beyond economic cycle went long. Between 1997 and 2006 institutions like endowments and analysis to underlying stock. We pick the stock moved from $2 to $58. pensions, and some fund of hedge able to fit into the stocks in companies we believe will While the stock remained in the fund money. Shariah compliant benefit from the current economic portfolio, whenever it approached Looking ahead to the Al Safi plat- cycle and over the longer term will its sale target price, Harnisch would form, Harnisch does not expect any restrictions without provide above-average earnings review its position. Depending on real problems. Peconic, he says, has growth,” explains Harnisch. market conditions he would add or worked with almost every major reli- any real change to He explains that the team tends subtract the position. At the same gion and been able to cater for any the way it trades. to develop ideas looking beyond the time, he might consider shorting of their demands on the investment economic cycle. It will look at a stock competitors to balance the position. front. He believes the fund will be to see if on the longer term it will Now he says the stock is short in the able to fit into the Shariah compliant provide a significant above-average portfolio. restrictions without any real change early growth, say, for example, Other core stock positions do not to the way it trades. before the company expands. necessarily stay as long as Best Buy Size is no problem The portfolio ends up as a series in the portfolio. He says his hedge of core positions that meet specific fund may behave a bit differently As to capacity, Harnisch is confident selection criteria on the long and to other long/short funds. Peconic the fund could easily handle $4–$5 exposure so the portfolio would not short side. Individual positions can trades a lot, constantly reviewing billion with current capacity. After be exposed to too much risk if prices go up to 5% at cost and up to 10% positions as stocks approach buy/ all, he points out, he had managed went the wrong way. at market value. Typically he says sell price and using short positions a $6 billion fund before starting his Going with gut instinct to hedge that long position. “We own hedge fund, so size should be no trade to adjust the risk of a position, problem for him. He sees the success of the fund as not because of a short-term view of Commenting on current market a combination of a sensible atti- a name,” he explains. conditions, he admits the US Secu- tude towards risk and a good nose The bottom line, says Harnisch, rities and Exchange Commission’s for companies. He trusts his gut is that since June 2002 he has been shorting ban has had only a limited instincts perhaps a bit more than able to create alpha on both long and effect on the way he trades. The real other hedge funds, but so far it has “A lot of money short positions. While results for this issue is the environment. “We did proved true. He steered well away went into the year are not as spectacular as in 2007 well in 2007, up all months. But now from Enron long before it became when the fund was up 64%, it is at there is no reason. Markets are up, toxic. He thinks the close relation- system and there least up a reasonable 6% plus this down. It is completely different this ship he and his team have with year. “Our clients are very pleased,” year.” industries and specific companies has been a lot says Harnisch, who says compared Gross exposure in the portfolio means they are able to see good and of research on to the current stock exchange per- is down to 58%, dramatically lower bad trends long before they hit. At formance, that is not a bad result. than in January. Harnisch saw what present he is still interested in the the stock picking Research is key to Peconic’s stock was coming and adjusted the risk analogue to digital story, but thinks side, too. We’ll do selection. He emphasises that the of the portfolio to the environment it has moved away from television company is self-contained. “We only in January. As things became worse and is now focused on broadband whatever is needed use Wall Street to supplement what as the year moved on, he was able to distribution of video and data. we do.” modify the portfolio to keep within He believes in incentivising his to make it work There are seven people in his risk limits. “What we can do is team to come up with the good ideas. as well for Shariah research, including Harnisch. Most protect capital. We watch our expo- While basic salaries may be low, of their time is spent with the com- sure very carefully. We take risk bonus payments reward analysts compliant trades panies they research, talking to measures, we look for new risk and who come up with good ideas. He as for our other managers, visiting the companies. we ensure we do not have any dan- emphasises that the team – all the A lot of emphasis is also placed on gerous concentrations.” For example, investment professionals – works accounts.” income and balance sheet analysis. corn usually trades without any together, to help generate ideas. Fundamentals, technicals and quan- relationship to the oil price. For at The system must be working for WILLIAM HARNISCH, titative research is done on all the least three to four months this year, Peconic, believes Harnisch, as the PECONIC PARTNERS companies. the prices of the two commodities fund is doing reasonably well and no While the fund manager may be traded in parallel. Therefore, Har- member of the professional invest- US based, the fund itself is global, nisch ensured that positions in corn ment team has left the company although Harnisch points out there and oil were consolidated as one since 2004. n November 2008 | Access to IslAmIc Hedge Funds supplement | 25 www.hedgefundsreview.com
  • 23. strategy profile Ex Goldman Sachs team finds value by keeping to what it knows best EnTrust Capital is an independent The principals have earned a the late 1990s the three wanted to The investment strategy is easily investment manager specialising in reputation as successful alternative pursue independent research so left defined. EnTrust is a free cash managing alternative investments asset managers by providing long- Goldman. flow-driven investor looking for for public, corporate and Taft- term risk-adjusted returns, exten- EnTrust’s founders decided to sustainable levels of cash that each Hartley pension funds, foundations, sive transparency and unparalleled form an independent money man- business can generate. It is also endowments, funds of hedge funds personal service. agement company free from the con- looking for companies that are well and high net worth individuals and This is achieved through a high flicts of a large investment banking managed. families. level of communication, performing institution. They believed the client Since the investment managers EnTrust Capital is an inde- its own due diligence and using relationships they had built up were are long-term investors, the quality pendent investment advisor reg- a proprietary risk management strong and performance results of management is a critical compo- istered with the US Securities and system. were solid. EnTrust was formed nent to the investment thesis. “We Exchange Commission (SEC) under The company’s principals have with $600 million plus assets under don’t want to be short well-managed the Investment Advisers Act of been together for over 15 years management from existing clients companies as they will find their 1940 and has just under $5 billion and between them have more than while at Goldman Sachs. way around industry roadblocks under management. 73 years of collective investment The investment focus of the and we don’t want to invest in poorly EnTrust Capital offers a range experience. global long/short equity strategy is managed enterprises despite valu- of alternative strategies including The three partners were origi- on bottom-up fundamental-driven ation,” explains Mark Fife, a man- a value-driven global long/short nally at Goldman Sachs, mainly research. The analysts and portfolio aging partner of EnTrust Capital equity strategy along with a fund working in private wealth with managers work in a collaborative, and portfolio manager of the global of hedge funds platform. high net worth individuals. In team-orientated atmosphere. long/short equity strategy. 26 | Access to IslAmIc Hedge Funds supplement | November 2008 www.hedgefundsreview.com
  • 24. strategy profile Low volatility goal ENTRUST CAPITAL GLOBAL LONG/SHORT EqUITy STRATEGy Risk management is critical to the SENIOR INVESTMENT TEAM way the portfolio is managed. The “Our portfolio is goal is to continue managing a Mark Fife has been a managing partner of EnTrust Capital since April 1997. relatively low volatility portfolio. Prior to forming EnTrust, Fife spent 14 years at Goldman Sachs where he very liquid. As a Entrust continuously reviews the managed money for high net worth clients. He is also the portfolio manager sector, geographic and capitalisa- matter of fact, if we of the global long/short equity investment team. tion breakdown. were just 20% of Two analysts work with him on the fund. Brian Delaney, a managing In addition, all position sizes are director of EnTrust Capital, has been with the company since August 2001. listed. “We do not allow any sector the trading volume Prior to joining EnTrust he was a manager at PricewaterhouseCoopers, which to be more than 15% net long or in a stock we would he joined in 1994. net short. No individual stock short position can be larger than 3% of expect that we Adam Comora is a partner of EnTrust Capital and has been with the the portfolio at market value. Our company since July 1998. Prior to joining EnTrust, Adam was an associate largest long position can be up to could liquidate 54% at Chase Securities, which he joined in 1994, specialising in distressed 6% of the portfolio,” explains Fife. securities. of our portfolio EnTrust invests in publicly traded equities. On rare occasions it may in a day, 76% in a hedge the portfolio by using options Investment process week and 9% of “We want to invest in companies but this is always a very minor part that have strong balance sheets so EnTrust has a repeatable invest- of the portfolio. the portfolio in 10 when the economic or market envi- ment process. It goes through the In some circumstances trades ronment is difficult the company same checklist or process on each will include event driven, spe- days.” can initiate their own value-creating and every potential investment idea. cial situations and pair trades, to catalysts by repurchasing stock First step is to start with the finan- name a few. MARK FIFE, or making accretive acquisitions,” cial documents attempting to ascer- The great majority of positions ENTRUST CAPITAL he said. tain the quality and sustainability both long and short are longer-term The focus is also in finding com- of cash flow and earnings. investments. “Our average holding panies with high and/or increasing The next step is to spend time on the long positions is one to three returns on invested capital. Com- meeting and speaking with the man- years and shorts average six to 24 panies that can generate attractive agement teams of the companies months. Occasionally, we invest in returns without having to constantly targeted to determine whether or stub and pair trades,” says Fife. reinvest large amounts of capital in not these are people EnTrust wants Liquidity is important, particu- the business are inherently more val- to be in business with. Some of the larly when some positions are held together since 2001. Four additional uable than companies that are large questions the analysts ask are: how for longer periods. EnTrust handles analysts have been added in the last users of capital, believes EnTrust. do they think about capital alloca- this aspect by keeping the portfolio several years. There has been little tion, how much of a stake do they highly liquid. turnover throughout the company’s own in the company, what is the “We invest in very few turnaround history. company’s history of results under situations. Our portfolio is very EnTrust believes it can manage their leadership? liquid. As a matter of fact, if we were significantly more money in the EnTrust speaks with industry just 20% of the trading volume in a strategy. “We have been looking at consultants and participants, stock we would expect that we could many more internationally head- former senior employees and com- liquidate 54% of our portfolio in a quartered companies in the past sev- “We want to invest petitors of the company. This pro- day, 76% in a week and 93% of the eral years and we plan to continue to in companies that vides a greater insight into industry portfolio in 10 days,” confirms Fife. expand our research team if assets dynamics and the particular corpo- The three senior investment team under management increase,” con- have strong balance rate culture of the entity. members of the team have all been cludes Fife. n sheets so when the EnTrust follows a disciplined investment strategy and attempts economic or market FUNDAMENTALS OF ENTRUST CAPITAL GLOBAL not to “play away games”. By this LONG/SHORT EqUITy STRATEGy EnTrust means it only wants to environment invest where it believes it has the Name of manager: EnTrust Partners is difficult the greatest edge – just like sports Address of manager: 717 Fifth Avenue, 25th Floor New York, teams have at home. company can NY 10022 Investors often make mistakes initiate their own by going outside of their circle of Contact: Marc Zwebner, managing director of competence, believes EnTrust. The business development value-creating investment team does not look to General company overview: Approximately $4.8 billion assets invest in every industry or country. catalysts by (including multi-strategy fund of hedge “We want to stay in our own repurchasing stock funds platform), 49 employees, offices in sandbox and only play where the the US (New York City, Washington DC, odds of winning are greatest,” says or making accretive Chicago) and the UK (London) Fife. acquisitions.” The sectors EnTrust focuses its Global long/short equity strategy: Approximately $670 million AUM in efforts on are retailers, industrial strategy as of October 1, 2008 manufacturers, business services, MARK FIFE, Target annualised return: 10%–15% media and entertainment, gaming ENTRUST CAPITAL and lodging, restaurants, and Target annualised volatility: 4%–7% energy. Geographic focus: US, Canada and Europe November 2008 | Access to IslAmIc Hedge Funds supplement | 27 www.hedgefundsreview.com
  • 25. fund profile Strategy focuses on natural resources and commodity sectors The Van Eck Hard Assets 2X strategy seeks absolute returns through long/short investments in natural resource equities and commodities. Launched in 1996, Van Eck’s Hard gross exposure of up to 300% and companies trading on a net asset to learn their views of the prospect Assets hedge strategy focuses on has a 6% portfolio stop loss. value basis at a 25%–50% dis- company and its industry and are energy, metals and mining, paper count to peers. Analysts pay par- able to develop a more complete pic- Investment process and forest products, agriculture and ticular attention to recapitalisations, ture of the investment opportunity. other hard asset sectors. The port- Investment ideas are generated from restructuring, consolidation, new Van Eck analysts conduct asset- folio employs a long/short strategy, various sources including company resource discoveries, management based evaluations and earnings and using fundamental research to capi- analysis, commodity analysis, and changes and other potential cata- cash flow-based valuations. Asset- talise on mis-pricing and valuation trade structure and evaluation. Port- lysts that can unlock value. based evaluations are particularly discrepancies. folio construction and risk manage- Van Eck analysts use a wide important when examining oil and The strategy is available with ment tools are used throughout the variety of sources and tools to gas producers, timber companies, two different risk profiles. The base investment process. research and evaluate equity invest- resource-based mining companies strategy limits gross exposure Equity investments come from ment opportunities. For example, and other asset-intensive resource typically to 150% and has a 3% a universe of 500 companies seg- analysts conduct intensive fun- companies. portfolio stop loss. The strategy mented into specific hard assets damental company research. Some key considerations in these generally maintains low net expo- sectors. Equity positions are concen- This includes company visits and evaluations include asset quality, sure, and typically allocates 20% to trated in energy, metals and mining, meeting with management. grade, location and accessibility, life pairs trades, 60% in relative value forest and paper products, and agri- These meetings are particu- and potential growth of reserves, as trades and 20% directional invest- culture, while futures investments larly useful for evaluating current well as current and future produc- ments. The majority of positions are focused on energy and metals. and projected financials and for tion costs, company hedging pro- are in equities with a minority in The universe of companies is inspecting operations. Van Eck grammes, balance sheet factors and futures. The 2X strategy can have a screened for value with a focus on analysts often contact competitors capital expenditure requirements. 28 | Access to IslAmIc Hedge Funds supplement | November 2008 www.hedgefundsreview.com
  • 26. fund profile Earnings and cash flow-based involved with the industry. This ting entry and exit strategies, spot- valuations are particularly appro- multiplicity of sources helps pro- ting emerging trends and identifying priate for aluminium companies, vide a thorough understanding of a changes in market sentiment. integrated oil/gas companies, pulp potential investment. Risk management is a high pri- and paper producers and other Various types of trades – com- ority for the investment team. Risk processing-based companies. In gen- modity/equity, equity/equity and is monitored at several levels. Posi- eral, these analyses focus on valua- commodity/commodity – are used tion-level risk is subject to a stop- tion criteria using peak, trough and to construct the portfolio. Trades based system. Directional trades Risk management normalised commodity prices. are monitored for position size, vola- and relative value trades have indi- tility and liquidity. The degree of vidual stops. Paired trades have one is a high priority Studying price projections analyst conviction on the position is stop based on the spread between Van Eck analysts pay particular also taken into account. the two instruments. for the investment attention to commodity price projec- The strategy’s typical portfolio The typical risk of an individual team. Risk is tions. Supply and demand, inven- has 20–30 trades comprising 30–60 position is 20–30 basis points with tory levels and excess capacity positions. For the original hard a maximum of 50 basis points. monitored at define commodity cycles. Van Eck assets hedge strategy, typical max- Positions are closed when the stop several levels. believes supply is a critical driver as imum net equity exposure is -20% is reached, when valuation or tech- it tends to be fixed over the short to to +45% while the typical maximum nical targets are reached, or when Position-level medium term. Other elements in the net commodity exposure is -25% to the trailing stop is triggered. price equation are capital spending +25%. If the portfolio is down 3% in a risk is subject and capacity constraints. Maximum gross exposure is single month (6% for the 2X port- to a stop-based Van Eck also believes low excess 150%. Sector net exposures typi- folio), the manager will neutralise capacity or inventory may sug- cally range from -10% to +10%. it. Thus far, this has resulted in a system. Directional gest higher future prices while The typical maximum net exposure maximum drawdown of 7.6% since trades and relative high excess capacity or inventory ranges from -35% to +35%. May 2000. could suggest lower future prices. For equity positions, the typical Note: This material shall not con- value trades have Product substitution, new tech- exposure ranges from -3% to +3% stitute an offer to sell shares in any nology and structural changes in and the maximum from -5% to fund. Past performance does not individual stops. end-user markets can also often put +5%. Commodity exposure is typi- guarantee future results; current a floor under commodity prices or a cally from -5% to +5%. For the 2X performance may be lower or higher cap on them. portfolio, exposure ranges are twice than the performance quoted. Van Analysts also use Wall Street as wide. Eck may change the method used research, attend conferences, read In general, the team reviews to evaluate companies and portfolio relevant trade publications and net- strategy performance monthly and methodology used from time to time work with consultants and others annually. This review helps in set- and over time. n PROFILE OF HARD ASSETS HEDGE STRATEGy INVESTMENT TEAM Edward Mitby, senior analyst, The nine-person investment team responsible for macro analysis with refiners and alternative energy. Prior is experienced and stable, with no respect to the commodity markets. to joining Van Eck, he worked at joined Van Eck Global in 2008 as departures since 2000. Each member From 1989 to 1995 he was a trader Goldman Sachs as an analyst/trader senior energy analyst. His work specialises in a particular sector. in euro bonds and emerging market for a $50 million global macro focuses on alternative energy, debt for Standard Chartered. hedge fund. engineering and construction Derek van Eck, portfolio manager, and quantitative analyses for Gregory Krenzer, trader and risk Joseph Foster, senior analyst, has over 15 years of investment alternative investment strategies. management experience and over manager, joined Van Eck Global joined Van Eck Global in 1996 as Prior to joining the company, 10 years with Van Eck. He has been in 1994 and has over 10 years of a precious metals mining analyst. he worked at Sailfish Capital the portfolio manager of the Hard experience in commodities, natural Since 1998, he has been the Partners as a senior research Assets hedge strategy since its resource equities and global fixed portfolio manager of the company’s analyst, creating and distributing inception in 1996 and is responsible income. He is the risk manager for flagship fund, International multiple long and short strategy for overseeing its investment the fund and specialises in trade Investors Gold Fund. From 1993 to proposals for trading equities, process and risk controls, and the construction. Prior to this, Krenzer 1996, Foster was a senior geologist corporate credit, rates, the ABX and hiring of analysts on the team. worked at Merrill Lynch from 1993 at Pinson Mining Company where mortgages. Van Eck is also a member of the to 1994 where he researched he managed an on-site geology Geoffrey King, analyst, joined investment team that manages investments for a high net worth department and conceived and the long-only Van Eck Global group. implemented a comprehensive Van Eck Global in 2007 as an Hard Assets Fund and the Van exploration programme on a 35 energy analyst. King’s previous work Shawn Reynolds, senior analyst, Eck Worldwide Insurance Trust’s square-mile land position. He has focused on the exploration and joined Van Eck Global in 2005 as Worldwide Hard Assets Fund. over 15 years of experience in production, refining, drilling and senior analyst focusing on energy. geology and mining. alternative energy markets. Before Charles Cameron, trader, joined Prior to joining the company, he joining Van Eck, King was employed Charl de M Malan, senior analyst, Van Eck Global in May 1995 as worked at Petrie Parkman & Co as by Merrill Lynch in the energy director of trading and has over 20 an energy analyst covering US oil joined the company in 2003 as a investment banking group. years’ experience in international and gas exploration and production precious metals and mining analyst. and financial markets. He oversees companies. Prior to joining Van Eck, he worked Dedicated industry consultants all trade execution for the fund at JPMorgan Chase as an equity Samuel Halpert, senior analyst, are also used to complement the and, in particular, specialises in research sales analyst specialising joined the company in 2000 and experience and analysis of the constructing commodity spread in South African mining, natural covers forest products, tankers, in-house team. and directional trades. He is also resources and financial sectors. November 2008 | Access to IslAmIc Hedge Funds supplement | 29 www.hedgefundsreview.com
  • 27. fund profile Diverse talents at core of healthcare investment success OrbiMed is the world’s largest Biotechnology Growth Trust) and vate equity markets. OrbiMed seeks drivers, believes Carter Neild, gen- healthcare-dedicated investment a family of global venture capital to be the capital provider of choice eral partner at OrbiMed Advisers. firm, with over $5 billion in assets funds. for life sciences companies pursuing First is demographics. Western under management. OrbiMed’s investment team growth and new opportunities. populations are on average ageing OrbiMed’s investment business, includes over 30 experienced profes- Where appropriate, particularly rapidly, with the proportion of founded in 1989, invests across the sionals with backgrounds in science, within its venture capital funds, the population aged 65 and over spectrum of healthcare companies medicine, industry, finance and law. OrbiMed actively supports its expected to increase by 50% or – from private start-ups to large The company’s diverse team of portfolio companies in achieving more in most western countries over multinational companies. professionals has a unique under- strategic, financial and operational the coming decades. The company manages a family standing of industry dynamics objectives via participation on the This ageing trend augurs well of healthcare-focused investment through active participation in board of directors. OrbiMed profes- for the future growth of healthcare funds including the Caduceus public and private companies. sionals currently serve on the board markets, as medical expenditure for Capital hedge fund, two investment These professionals work together of directors of dozens of different people over 65 years of age is on trusts listed on the London Stock in a collaborative approach which life sciences companies. average four times higher than for Exchange (the Finsbury World- integrates the analytical insights The healthcare sector has a pow- those under 65. wide Pharmaceutical Trust and the derived from both the public and pri- erful set of three secular growth China is a particularly exciting 0 | Access to IslAmIc Hedge Funds supplement | November 2008 www.hedgefundsreview.com
  • 28. fund profile For instance, the recently launched tion activity creates an attractive believes that OrbiMed’s long/short vaccines for the human papillo- entry point for investors today. specialist healthcare fund, Caduceus mavirus are poised to effectively Pharmaceutical and biotech- Capital, will continue to prosper prevent the vast majority of future nology companies have gener- as it has over the past 15 years. cases of cervical cancer. ally underperformed the broader Neild believes a long/short equity There are over 1,000 such poten- markets by a cumulative margin strategy has significant advantages tially promising products in the of 25%–40% over the past six or in making healthcare investments Western drug industry pipeline currently seven years, according to Neild. As that are not available to a long-only under review by OrbiMed. OrbiMed a result, valuations for larger bio- static approach. populations are believes the future is particularly technology companies are now near on average ageing Wide dispersion bright for the biotechnology sector historical lows by measures such as as more biotechnology companies price/earnings ratios and price/sales First, there is a wide dispersion of rapidly, with the are becoming profitable. ratios. returns for companies within the proportion of the A total of 73 biotechnology and Non-cyclical growth opportuni- biotechnology and pharmaceutical emerging drug discovery compa- ties, such as healthcare compa- sectors because these companies population aged 65 nies (including acquisitions) had nies, have often rotated into favour generally have a ‘binary’ nature attained profitability as of 2007 and during previous economic reces- to their development. Either their and over expected a further 32 companies are expected sionary environments. therapies work, and the stocks go to increase by 50% to achieve profitability by the end of For example, the Amex Biotech- up, or the therapies fail along with 2009. nology Index increased 46% in 1990 the stocks. or more in most and over 190% in 1991, a period A long/short equity fund can Growth drivers western countries similar to today’s economic environ- make money from either type of The final growth driver for the ment. outcome and is not solely depending over the coming healthcare sector is the trend Merger and acquisition activity on playing the ‘winners’. towards rising global affluence. A is strong. The large pharmaceutical Additional, the ability to manage decades. disproportionate share of income companies need to pay high prices tactically net market exposure is growth tends to be spent on health- for biotechnology acquisitions. also advantageous in the healthcare care as the newly minted middle A dozen significant acquisitions sector, as volatility, particularly for classes in many countries begin have been announced in the past few biotechnology stocks, can be high. to demand quality western-style months, including a $7 billion offer The impact of investor sentiment healthcare. for Imclone Systems from Eli Lilly changes and retail investor money This is particularly true in China and a $44 billion offer for Genentech flows combine to create high vola- and India where there is a rapidly from Roche. tility and frequently over-bought or growing middle class demanding over-sold market conditions. Lack of competition better medical care. A long/short equity fund is demographic story, as its elderly China’s pharmaceutical market The business of investment in the capable of altering net market expo- population is expected to double by is growing two to four times faster healthcare sector has become far sure in response to these market 2025, thanks partly to the controver- than western markets. Emerging less competitive over the past few cycles in order to seek additional sial “one child” policy. markets overall account for more years thanks to a significant amount alpha generation possibilities. Innovation is a second key growth than one third of recent pharmaceu- of attrition among the group of spe- But this sector is not to be entered driver. New markets are created tical growth. cialist hedge funds focused on the lightly through generalist funds over time thanks to the ineluctable These factors lead OrbiMed to healthcare sector. who lack deep scientific and medical progress being made in the scientific believe that investing in healthcare Less competition provides the research experience. understanding of human diseases. now is a compelling opportunity. survivors, such as OrbiMed, with The highly technical nature of Innovative new drugs and treat- Historically low valuations and non- greater market inefficiencies and analysis of emerging drug and ments inevitably flow from this cyclical growth companies coupled less competition for new ideas. medical device products requires a greater understanding of disease. with rampant merger and acquisi- For all these reasons Neild highly specialised research team. PERCENTAGE OF POPULATION OVER 65 BIOTECH HEALTHLINE HEALTHy AND GROWING 1,200 30 % Phase 1/Iia 2000 Phase 1I/III or III 2025 1,000 25 800 20 15 600 10 400 200 5 0 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 UK Japan US China Source: Goldman, Sachs & Co Source: United Nations November 2008 | Access to IslAmIc Hedge Funds supplement | 1 www.hedgefundsreview.com
  • 29. fund profile and complements the investment and short best ideas on a global Some additional strategies which process with a rigorous set of risk basis. are non-correlated to equities com- management protocols. Typically the portfolio holds 35 plement the core long/short equity According to Neild, OrbiMed has core long and 20 short positions. A book, including an options overlay an edge over other funds because its typical mix of positions contains 15 strategy and a dedicated effort to large team gives it the ability to gain profitable companies, 20 emerging acquire pharmaceutical royalty The investment more extensive coverage of scien- companies and 20 short positions. streams. tific and medical news. There are daily investment meetings team attends Al Safi link to discuss the portfolio. Close contact major therapeutic As with any hedge fund, risk OrbiMed has a long-term strategic The investment team attends major management is a serious issue. interest in the Middle East. Neild conferences therapeutic conferences and fre- Bottom-up stock selection empha- expects opportunities in pharma- quently reviews relevant scientific sises companies where risk factors ceuticals and healthcare services and frequently literature and journals to keep and correlations are well under- to be attractive to investors in the reviews relevant abreast of developments and find stood. region. the companies most likely to be the Net market exposure averages He believes the way OrbiMed con- scientific literature target of attention on either the long 60%–70% but is adjusted dynami- structs its funds will require little and journals to or short side of the portfolio. cally in response to changing market change to make them Shariah com- The team has developed wide conditions. pliant. keep abreast of networks and relationships with “The nature of the healthcare Diversification independent medical consultants. In companies we focus on means they developments and addition, it carries out surveys with The portfolio is diversified. It is are not leveraged or have a lot of find the companies physicians to identify trends and typically made up of a selection of debt. We would not expect to have to new areas of research. the big name pharmaceutical com- change the way we run the protfolio most likely to In a typical year, investment pro- panies, smaller specialty pharma- in any meaningful way,” concludes be the target fessionals from OrbiMed will meet ceutical companies, generic drug Neild. with management team members at makers, medical device manufac- After an initial approach from of attention on upwards of 90% of the companies turers and mature and emerging Barclays Capital, the due diligence in their sector. biotechnology. process has begun on both sides either the long or They also work closely with the Exposures are a mix of North “We see real opportunities to short side of the private equity team to leverage rela- America, Europe and Asia. Posi- work with Barclays in a strategic tionships with venture capital stage tion sizes are limited for individual partnership. We’ve been to the portfolio. companies. equities. Large-cap companies are region several times and expect OrbiMed has access to agency and typically sized at 4%–7%, mid and over time to establish a permanent policy maker views on important small caps at 2%–4% and with presence in the Middle East,” Neild drugs, speaking with, for example, short sales at 1%–3%. explains. n current and former employees of the US Federal Drug Administra- tion. To facilitate its global research MORE BIOTECHS ACHIEVING PROFITABILITy efforts, OrbiMed has team members based in New York, Mumbai and Shanghai. Expertise and research • 73 biotechnology and emerging drug discovery companies have reached Portfolio construction Despite these considerable chal- profitability through 2007 (including 39 companies acquired) lenges, OrbiMed believes it has put Portfolio construction is disciplined • Another 32 companies are anticipated to overcome ‘accidents’ to achieve together a winning formula. and research-intensive. From a list profitability by 2009 Its investment team includes of 750 public companies (including • Profitability —> broadens investor base —> increases valuations and liquidity over 30 professionals exclusively 500 US), analysts screen out the focused on the healthcare sector. Its middle 350 as neither good enough activities cover the whole gamut of to buy nor bad enough to short. An 120 healthcare investments across all analyst typically looks at 50 stocks. Number of pro table biotechs major geographies, sub-sectors and From the 400 companies Acquired company stages. remaining on the active list, fair Independent 100 value estimates and valuation Strategy screens are created. According to Neild, the company Analysts meet with the manage- 80 pursues a simple (in concept) ment of each company at least once strategy. OrbiMed seeks long invest- a year. From this process another 60 ments in companies pursuing novel 200 companies are dropped as they therapeutics that will be success- are seen to have no catalyst for an fully commercialised and generate investment thesis. 40 meaningful revenues. The remaining 200 names are On the short side OrbiMed seeks studied intensively. Detailed busi- 20 companies pursuing therapies that ness forecasts and research are will fail in clinical trials or suffer undertaken, including frequent disappointing commercial launches. discussion with company manage- 0 The process is driven by intensive ment. 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 proprietary research. The company Analysts working in conjuction Source: OrbiMed Advisors Estimate takes a worldwide perspective to with the two senior portfolio man- find the best opportunities globally agers make a final selection of long 2 | Access to IslAmIc Hedge Funds supplement | November 2008 www.hedgefundsreview.com
  • 30. strategy profile Investment approach based on deep research is key to Alkeon Sticking to your strategy and agement industry for more than a the bird, Alkeon has been able to company where we would put our maintaining risk parameters is decade. Sparaggis has been man- give good news to investors. He own money? If the answer is ‘yes’ essential, particularly during a dis- aging various hedge fund strate- says the company has received net we look at the price and other funda- located market. This is the view of gies since the early 1990s, initially inflows in recent months as inves- mentals,” he explains. Panayotis ‘Takis’ Sparaggis, presi- at Credit Suisse First Boston Asset tors perceived the strategy as one The portfolio aims to be a collec- dent and chief investment officer of Management and then at Oppenhe- focused on maintaining value and tion of “great assets” says Spar- Alkeon Capital Management. The imer, where he started a global long/ discipline. aggis. The challenge of finding good company was founded after Spar- short growth strategy as a propri- The global long/short equity companies and producing double aggis exited CIBC Oppenheimer etary account. strategy which Sparaggis started alpha – by this Sparaggis means with his team that had been running He set up Alkeon to follow the managing in January 1998, is producing alpha on both the long a global long/short growth equity same intensive investment process growth orientated. The research is and short side of the portfolio – is hedge fund. The split was friendly, he followed at Oppenheimer. bottom-up and focuses on all growth what makes him get out of bed in says Sparaggis, and has resulted in The company is named after the sectors, countries and market capi- the morning. “I really like this busi- a highly cohesive team. African seabird, Alkyonis, which talisations. Sparaggis neatly sums ness,” he admits. This should come as no surprise, is usually seen in January and Feb- up the style by explaining the The only sectors Alkeon avoids given the collective experience of ruary as a harbinger of spring in approach is “really a private buyer’s are oil, metals, mining and commod- the team, most of whom have been Greece (where Sparaggis was born), perspective. We look at a business ities. Sparaggis does not believe the involved in the investment man- bringing with it warm winds. Like and the question we ask is, is this a team’s strength lies in these areas November 2008 | Access to IslAmIc Hedge Funds supplement |  www.hedgefundsreview.com
  • 31. strategy profile The focus is on product cycle and team also helps them make the right security and in reality this figure during disruptive cycles growth has investment decisions during volatile is much lower in almost all cases. little to do with what is happening times. When markets are dislocated, Typically, Alkeon holds between in the economy around it. These it is difficult to understand them. 100 and 150 stocks in the portfolio cycles are clearly defined, with a Sparaggis believes his team is able with a one- to two-year horizon on “We do not hold beginning, middle and an endpoint, to do this and exploit the dislocation all investments. We’re fundamental more than 10% and are relatively short, lasting two and volatility while managing risk. investors. We have price targets for to three years sometimes. “The current liquidation and both our long and short positions. in an individual By focusing on the product cycle, redemption process by hedge funds We scale in and trim our positions Alkeon looks at what developments and funds of funds has led to a severe as we approach price targets. We security and in are likely to add significant value industry dislocation, which creates take advantage of volatility. Our reality this figure to a company, or the reverse for the opportunities. It is very attractive. turnover is in direct proportion to short position. Traditionally the But we still preserve the integrity the underlying volatility,” says Spar- is much lower in portfolio has a 30%–70% net long of the process. We go forward with aggis. But he is clear that Alkeon almost all cases. bias. But the real strength, Spar- reasonable participation opportuni- does not allow itself to be seduced aggis believes, is the team’s ability ties, but we do not expose ourselves by the opportunities, particularly in We’re fundamental to find alpha not just on the long to a level of risk that we would not times of severe market dislocation side, but on the short side which normally have. We are balanced. The as evidenced now. investors.” provides excess returns. “Most long/ temptation is to shoot off and buy For all the positions, both long short funds break even on the short everything. That’s a natural inclina- and short, a price target is set. Some PANAYOTIS SPARAGGIS, side over the long run. We can add tion. But our ability is in a measured stocks hit the price target relatively ALKEON CAPITAL significant alpha on the short side,” response, decisive on stock selection quickly, within a month or two, while MANAGEMENT he says. “If we can provide alpha and sizing,” says Sparaggis. others may be held for up to two over both long and short positions, When there is severe downward years. Sparaggis explains as a stock this enhances the long-term return market dislocation people are often approaches the price targets, Alkeon of the portfolio.” forced to sell. They need to delev- might increase or decrease its posi- This technique has been particu- erage; they need to raise cash. This tion. “We’ll do some opportunistic larly successful in technology; Spar- kind of environment creates oppor- trading as a stock approaches our aggis says they have had “a lot of tunities with stocks going down price target. We may retreat, we and believes that it is a different skill success in technology shorts”. with no regard to the actual value. may add to the stock position,” says set to forecast commodity prices. For the long side Alkeon looks at Nevertheless, Alkeon keeps to the Sparaggis. a company’s probabilities for failure same principles, despite the plethora Certainly Sparaggis believes the Focusing on growth or success, given its business model, of opportunities presented. intensive research and extensive The focus is on growth, seeking out and across its entire structure. In “We keep our focus, approaching industry contact network is fun- the best stocks and also those that technology, a company’s good idea positions from the private buyer’s damental to Alkeon’s edge and its are being challenged which could be could become obsolete overnight. perspective. Is this a good business? success in picking long and short candidates for shorting. The process “The fundamentals change very rap- Strong fundamentals, strong man- positions. concentrates on the profitability of a idly, there is volatility in the funda- agement team, strong balance sheet? Alkeon is not macro focused. It company, its balance sheet, strength mentals and this is what we exploit Bear, bull, dislocated or normal mar- uses macro inputs only to assess of its management team and other on the short side,” says Sparaggis. kets – there are always opportunities risk as it relates to individual stock key factors. If these are all positive, and of course better ones in a dislo- picks. For example, explains Spar- Ideas from industry and show the potential for growth, cated market. We are always looking aggis, if he is looking at a particular the stock could be a candidate for How Alkeon finds companies is for the opportunity to make money, company in China or Russia, he the long side of the portfolio. If the simply through a strong network of but we will stick to our fundamental will look at the macro-environment, equity displays negatives in these industry contacts. “We get our best principles,” explains Sparaggis. political risk and any other factors areas, then it could become inter- ideas from the industry, not Wall He agrees the current market has relevant to the company so that he esting on the short side. Street,” Sparaggis confirms. He says thrown up many attractive opportu- has a clear view to assess the risk. Sparaggis believes this technique Alkeon meets with hundreds of nities. However, he is adamant that “But macro doesn’t drive invest- holds true in any market. He is also companies every year. even with so much opportunity, ment decisions. We look at business careful only to invest in publicly “We talk to them. It is classical Alkeon must exercise a reason- analysis and macro issues only on traded, liquid stocks. deep research. Maybe it sounds very able level of caution, maintain high the risk side. If we are uncomfort- One area of particular expertise tedious and unglamorous, but it is liquidity and above all protect the able with the risk, we won’t invest,” is in technology, which Sparaggis highly effective. When we meet with portfolio. “There are three levels of he says. loosely describes as TMT (tech- these companies we have intelligent portfolio diversification we empha- The approach of Alkeon is con- nology, media and telecommunica- conversations about business trends. sise. We don’t depend only on a sistent, says Sparaggis. The com- tions), life sciences and alternative We share information. We build couple of countries or sectors. There pany will remain diversified and energies. With his own background relationships at a deeper level. It is is no dangerous concentration. We global, and the stock picking will be – a PhD and Master’s in electrical not one-way communication. It is keep a reasonable level of diversity, based on extensive research across and computer engineering and an not a meeting set up by Wall Street with high liquidity, staying well all sectors. MBA from the University of Mas- where you have a few questions. We diversified across all countries, sec- His strategy has proved popular sachusetts, as well as an IBM fel- come prepared. We understand the tors and individual securities.” with his investors. Sparaggis con- lowship in physical sciences – he foundation of the business and add firms he looks at investors as part- Avoiding blow-ups has the knowledge and capability intellectual depth to the discussion,” ners in the strategy for the long to understand this particular sector, Sparaggis explains. Sparaggis believes hedge fund term. “We have a very loyal investor although Alkeon is not tied to just This relationship built with senior blow-ups and poor performance are base. We make the effort to ensure this sector. managers of companies is what caused by two things: excessive lev- investors understand our strategy Part of the attraction of tech- Sparaggis believes gives Alkeon’s erage and excessive concentration. and understand the asset allocation. nology stocks, says Sparaggis, is team its edge in producing alpha “We try to avoid both by design,” It is extremely important to us that that companies which innovate are consistently on both the long and confirms Sparaggis. “We do not hold they are in the strategy for the long decoupled from the economic cycle. short sides. The experience of the more than 10% in an individual term,” Sparaggis concludes. n 4 | Access to IslAmIc Hedge Funds supplement | November 2008 www.hedgefundsreview.com
  • 32. contacts page Contacts for Al Safi Trust Platform Fund-linked Derivatives Frank Gerhard Nicolas Robin Postal address Director, Head of Fund Derivatives Product Fund Derivatives Structuring Barclays Capital Strategy +44 (0)20 7773 5751 5 The North Colonnade +44 (0)20 7773 1328 nicolas.robin@barclayscapital.com Canary Wharf frank.gerhard@barclayscapital.com London E14 4BB UK Market Solutions Group Harry Martin Postal address Director, Market Solutions Group – MENA Barclays Capital +971 4 362 1015 The Gate Building harry.martin@barclayscapital.com Level 9 West Wing Dubai PO Box 506504 United Arab Emirates Prime Services Kieran McCann Lauren O’Hara Postal address Director, Prime Services Sales Director, Prime Services Sales Barclays Capital +1 212 412 1105 +1 212 412 3176 745 Seventh Avenue kieran.mccann@barclayscapital.com lauren.ohara@barclayscapital.com New York City New York 10019 USA November 2008 | Access to IslAmIc Hedge Funds supplement | 5 www.hedgefundsreview.com