Shariah compliant investment vehicles take socially responsible investing (SRI) to a new level, proving that conscious investing does not necessarily depress returns. Hedge funds can turn to specialty shops that specialize in weeding out investments that violate Islamic Law. Non-accredited investors (investors with less than $1 million to invest) can also gain admission by following Shariah indexes or mutual funds.

Investing Under Islamic Law
Islamic law does not permit investors to derive benefits from interest paid on loans, the sale of pork, firearms, and other sin investments related to pornography, gambling, alcohol or tobacco. Institutions that engage in short selling and the use of leverage are also frowned upon since borrowing goes against one of the basic principles of Islamic law. Following these rules cancels out the possibility of investing in investment banking firms like Goldman Sachs (NYSE:GS), insurers like AIG (NYSE:AIG) and other financial service firms that use derivatives as a way to boost their profits. (To learn more, read What is an Islamic investment policy?)

Islamic Law Hedge Fund Advisor
Shariah Capital, one of the world's best Islamic financial institutions according to Global Finance Magazine, is one resource hedge fund managers turn to when developing strategies to meet the Shariah compliance needs of their clients. Islamic law scholars and attorneys work with clients to find suitable investments and devise products that attempt to mirror strategies involving short selling and the use of leverage.

Shariah Indexes for Individual Investors
Standard & Poor's (S&P) has compiled more than 20 Shariah indexes focusing on specific countries, such as Japan or emerging markets and broad categories like global infrastructure and global property. Individual investors can begin by focusing on two broad Shariah-compliant equity indexes introduced by S&P earlier this year. The S&P CNX Nifty Shariah Index and the larger S&P CNX 500 Shariah Index are both in partnership with India's National Stock Exchange. Indian outsourcer Infosys (NASDAQ:INFY) is the most familiar stock among the top three holdings on each index. The other top holdings of each include, oil conglomerates, reliance industries and India's largest engineering company Larsen & Toubro (OTC:LTOUF).

Shariah Compliant Funds
The Amana Trust Income Fund (AMANX) also helps investors take the guess work out of choosing Shariah compliant investments. The fund is almost completely void of financial service companies enabling it to outperform the Standard & Poor's 500 Index (S&P 500) by roughly 6% a year to date. The AMANX fund has a three and five year return of 11.72% and 15.78% respectively. The funds top three holdings, include United States Steel (NYSE:X), energy company FPL Group (NYSE:FPL) and natural gas company EnCana Corporation (NYSE:ECA). The Iman K Fund (IMANX) is a much smaller Shariah compliant fund with a similar focus.

Socially responsible investing is growing in the U.S. Investors should know the rules other cultures incorporate into their socially conscious investment decisions. In addition to the social benefit derived from choosing investments based on Islamic laws the strategy has also proved to yield positive returns for its investors.

Related Articles
  1. Professionals

    A Day in the Life of a Hedge Fund Manager

    Learn what a typical early morning to late evening workday for a hedge fund manager consists of and looks like from beginning to end.
  2. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Financial Advisors

    Are Alternatives Right for Your Portfolio?

    Alternative investments are increasingly making their way into retail investors' portfolios. Are they a good fit?
  6. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  7. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  8. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  9. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  10. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  1. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  2. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  3. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  4. Can hedge fund returns be replicated?

    You can replicate hedge fund returns to a degree but not perfectly. Most replication strategies underperform hedge funds ... Read Full Answer >>
  5. Can foreign investors invest in US hedge funds?

    U.S. hedge funds are open to accredited investors. When they distribute profits to investors, those proceeds are taxed at ... Read Full Answer >>
  6. Do hedge funds manipulate stock prices?

    Some economics professors think there is evidence of manipulation of certain stocks by hedge funds on key reporting days. ... Read Full Answer >>

You May Also Like

Trading Center