Islamic Versus Conventional Mutual Funds Performance In .

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JKAU: Islamic Econ., Vol. 23 No. 2, pp: 157-193 (2010 A.D./1431 A.H.)Islamic Versus Conventional MutualFunds Performance in Saudi Arabia: A Case StudyHesham Merdad, M. Kabir Hassan and Yasser Alhenawi, (1)Department of Economics and FinanceUniversity of New Orleans, New Orleans, USAmhassan@uno.edu, kabirhassan63@gmail.com, KabirHassan63@gmail.comAbstract. Using a sample of Islamic and conventional mutual fundsmanaged by HSBC, the fourth largest fund manager in Saudi Arabia,from January 2003 to January 2010, we examine their risk-returnbehavior by employing a number of performance measures such asSharpe, Treynor, Jensen Alpha and their variants. We divide thesample period in four segments such as full period, bull period, bearishperiod and financial crisis period to analyze further if these two fundsperformance differ from each other. We also examine the markettiming and selectivity of HSBC managers of their portfolioperformance. We find that Islamic funds underperform Conventionalfunds during full period and bullish period, but they overperformconventional funds during bearish and financial crisis period. Suchresults are consistent with prior studies with other Islamic andconventional mutual funds. HSBC managers are good at showingtiming and selectivity for Islamic funds during bearish period, and forconventional funds during bullish period. One important portfoliolesson from this case study is that Islamic mutual funds do offerhedging opportunity for investors during economic downturns becauseof the restrictions that Islamic law imposes on portfolio selection.I. IntroductionMuslims represent 21.01% of the world's population (CIA world's fact book–2007)(2) growing at 1.84% annually (Carnegie Endowment for International(1) M. Kabir Hassan is a Professor in the Department of Economics and Finance. Hesham Merdad isdoctoral candidate in the same department. Yasser Al-Henawi is an Assistant Professor of Financeat University of Evansville. The authors acknowledge the valuable suggestions and comments oftwo anonymous referees, which vastly improved the clarity and quality of our paper.(2) “The world factbook, " Central Intelligence he-world-factbook/geos/xx.html, Oct. 20, 2008.157

158Hesham Merdad et al.,Peace – 2007)(3) and they have between USD 250 billion and USD 1 trillion toinvest Chow (2006) growing at 15% annually in a market that is not fullyexploited (Hassan,2001). Islamic mutual funds have been around for less than adecade and are still in their infancy stage of growth and development (Girardand Hassan, 2005).According to a McKinsey Management Consulting Firm report, “Islamicfinance is the new force in the financial market place.” Islamic banking,growing at a rate of 15% in the mid-1990s (Hamid and Azmin, 2001) isexpected to be a dominant growth engine in finance and banking in thismillennium. The past decade witnessed a rapid growth in the Islamic bankingand finance market making it one of the fastest growing niches in global finance(Aggarwal and Yousef, 2000).Many Western financial institutions (including, for example, Citibank,Barclays, Morgan Stanley, Merrill Lynch and HSBC) now sell Islamic financialproducts. The New York and London Stock Exchanges launched Islamicindexes to track the performances of firms that conform to Islamic investingrules. In December 1998, FTSE, in collaboration with the International investor,launched FTSE Global Islamic Index Series (GIIS). GIIS are equity benchmarkindices designed to track the performance of leading publicly trading companieswhose activities are consistent with Islamic trade and investment principles.Academic research on Islamic mutual funds, however, is limited. Most ofthe research done is a thought experiment where Islamic rules are imposed onconventional funds to create portfolios of hypothetical Islamic funds. Further,most of previous research is conducted with reference to a conventional market(i.e. Islamic investment rules are not applica

Islamic Versus Conventional Mutual Funds Performance 159 That is, we use all mutual funds managed by HSBC, the fourth largest fund manager in Saudi Arabia, from January 2003 to January 2010 to examine the risk-return characteri

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