Principles of Islamic banking and finance/PIBF203/Hedging and derivatives/Video signpost
In this video, Dr. Shamim Siddiqui from Hamdan Bin Mohamed Smart University, provides an overview of Hedging and Derivatives from an Islamic perspective
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Video transcript
Hedge funds are investment vehicle that can be designed to manage risk of private portfolios of assets. They typically employ complex investment strategies. But hedge funds can also be alternative investment vehicle to exploit perceived security mispricing by hedge fund managers who engage in arbitrage trading assuming significant financial leverage ( such as short-sales, borrowing and derivatives). Presently, a great deal of skepticism exists among investors in Arab/Islamic countries regarding the structure of hedge funds and their apparent non-compatibility with Sharia’a laws. Hedge funds returns have been driven in large part due to the use of leverage and associated short-sales that are not permissible under Islamic finance rulings. The use of leverage under Sharia’a is extremely selective and is only allowed under conditions where assets are purchased on deferred payment basis or through the use of Islamic debt. Short-sales, however, involve the sale of assets not in the possession of the investor and as a consequence are non-tradable for an Islamic hedge fund. It is the consistent opinion of most scholars that the risk of payment can not be transferred to another party. Scholars have begun to accept investment in hedge funds if they are for hedging purposes, but not if they are seeking to speculate or gamble. However, It is difficult to distance hedge funds from excessive speculation. In this session we will discuss these issues in some detail.
