Deutsche Bank expects demand for hedge funds that comply with Muslim law to take off in the second half of 2008 as structures become more defined and credible fund managers and brokers set up to handle the products.
The move would be the latest attempt to marry huge demand for Islamic investments with the returns on hedge funds.
"There is demand for Islamic hedge funds, mainly from ultra high net worth individuals who already look at conventional hedge funds and would have a preference for Islamic," said Geert Bossuyt, managing director, regional head of Middle East structuring at Deutsche Bank.
International financial institutions, including Deutsche, are working on handling sharia-compliant hedge funds with the second half of the year and 2009 likely to see the industry begin to flourish, Bossuyt told the Reuters Islamic Finance Summit.
"I think we are almost there with some big names, and with reasonably big investment banks including Deutsche," he said, adding that the market was demanding products from established institutions rather than new players.
Barclays Capital, with its US-based partner Shariah Capital Inc, said in September it planned to launch Islamic hedge funds offering investors a group of hedge funds that would be managed according to Islamic law, or sharia -- rules that many bankers and investors say forbid common hedge fund strategies such as short-selling.
"You have to sort out the shorting issue," said Bossuyt. "You can't sell what you don't have in Islamic finance ... That's one of the ground rules."
Bossuyt said it could be achieved by creating a synthetic short position through selling derivative options such as in a salam contract.
Salam is a contract in which advance payment is made for goods to be delivered later on.
Bossuyt said some scholars are still at odds over whether a synthetic short completed in an Islamic way is acceptable.
"Where is the reasoning that you can say I can benchmark (sukuk) against London Interbank Offered rate (LIBOR), but I cannot benchmark against a short ... Why is one allowed and one not allowed?" he said.
While parameters are becoming more defined, finding the right people to deal with the complexities of such contracts is still difficult.
"In my opinion, people are getting more used to Islamic finance and are making their prime brokerage ready ... and some actively promoting, and 2008 could be the new birth of Islamic hedge funds." (Reuters)
Deutsche sees Islamic hedge fund growth in 2008