MALAYSIAN ISLAMIC FINANCE Issuers and Investors Forum 2006

Alternative Islamic Investment Structures

Abdulkader Thomas opened this session on alternative Islamic investment structures by throwing a basic question to the panel: “What is your definition of an alternative investment?”

Douglas Clark Johnson spoke of his learning curve when starting up Calyx Financial. Initially he made the mistake of thinking that alternative investments were primarily hedge funds and private equity. However, with experience he has learned that the definition was in fact far broader and was open-ended: “a definition that’s morphed over time, and that will continue to morph.”

Saif Dhorajiwala of Avigo Corporation maintained that the definition depended on the personal investor and how he wanted his portfolio to look. As the name suggested, alternative investments would not form the bulk of an investor’s portfolio, but would instead provide them with diversification.

Mohammad Shaheed Khan, manager of Islamic product development at ABN AMRO in Pakistan, said simply that an alternative investment was basically what all Shariah compliant investments were, adding that now techniques have been developed to enable an investor to gain exposure to any asset class he desires.

The chief executive officer of Swiss asset management firm Encore Management, John Sandwick, took up the discussion by saying it used to be that 5% – if that much – was the institutional average for alternative investments in a portfolio, whereas now that percentage
was going up to beyond 10%. The alternative investment space has gained in size, volume, percentage ownership
and credibility.

He then voiced some criticism of certain Gulf banks for pushing too much alternative investment and not enough mainstream, traditional asset categories. In the light of this, Encore was going to launch the world’s first non-Malaysian Sukuk fund. Since, in his view, alternative investment product offerings were pushing out everything else and preventing the development of a full spectrum of assets, there was space for such a core, non-alternative investment asset in the Islamic world.

Douglas claimed that there had been a 75% growth rate in Islamic alternative investments since 2000 – about three times what was seen in the conventional hedge fund space. As growth continues to move forward, there will be more and more products that are viable and unique in this space.

Saif explained that Avigo was involved with private equity investing in India. Avigo’s Shariah compliant private equity branch raises money from Islamic investors across the world and invests into SMEs in India. Abdulkader clarified that Avigo was actually “double alternative investment, as on the one hand you’re in a market which is unique and distinct in its own right, being India, and secondly you’re into private equity in a different space.”

Shaheed touched on standardization – just as certain Malaysian structures are not acceptable in GCC, certain structures from the GCC are unacceptable to Pakistani scholars, which confronts Pakistan-based companies with a problem, especially as, in his view, “Pakistan is a market where everybody is a scholar in his own right.” Because of this, ABN Amro endeavours to develop products which are acceptable to Pakistan first and foremost.

He added that it was important not to forget basic service issues when dealing with customers. “Customers want innovative products, they want world class service and they want pricing which is comparative to conventional products – that’s the challenge in the Islamic arena.”

Responding to the question what would make the MIFC an attractive spot to launch, distribute and raise funds for alternative investments, Shaheed said that harmonization issues needed to be addressed, whereas Douglas believed that the shift from a supply driven to a demand driven market needed to be heeded to, especially as he anticipated a heightened degree of demand from the market. It was agreed that regulation and standardization of a Shariah benchmark were also key factors.

A question from the floor asked for the panel’s view on the perceived lack of appetite for Islamic hedge funds in the market. The panel appeared to be in agreement with Shaheed’s candid opinion that, due to the lack of consensus on their Shariah compliance, “I won’t touch them with a nine-foot pole and wouldn’t recommend them to anyone else.” Douglas added that huge performance challenges faced, coupled with the lack of consensus on the structures of such funds, meant that their chances of success Islamically were limited.

John offered these concluding words, bringing the discussion back to his opening comments on alternative investments: “When I started my career, alternative investments were very high risk, at 5% of institutional portfolios. Now that they’re 10%, it means that we understand the risks better and we consider the risks lower. Alternative investments have changed a lot. It’s all about risk management.”