Islamic superannuation fund Crescent Wealth has expanded its investment toolkit with the addition of Shariah-compliant currency hedging.
The fund signed a hedging contract with Malaysian bank CIMB in April to implement currency hedging, which gives the fund more flexibility in managing its risk.
“Since April, we were able to offer our members Shariah-compliant currency hedging, which is a first in Australia,” Jason Hazell, Chief Investment Officer of Crescent Wealth, says in an interview with [i3] Insights.
“It would have been perfect if we got the hedging in place when the Australian dollar was still at 55 cents, but we managed to get some low 60 numbers in our hedging contract, which is great.”
Currency hedging is tricky under Shariah law as it is often associated with speculation, something that is prohibited under the Islamic rules. Hazell, therefore, had to ensure there were safeguards in place to ensure hedging was used for risk management only.
“Often there is an impression that counterparties are speculating, but we want to use it for risk management purposes,” he says.
“Those who offer Shariah-compliant forward contracts have had to split whatever they might be doing on the speculative side from the risk management side and put a formal Chinese wall in place to satisfy the requirements of Shariah law.
“It is a different contract that has been created and is signed off by AAIOFI, the Accounting and Auditing Organisation for Islamic Financial Institutions, and Shariah advisers. So the contract is Shariah compliant.
“From our perspective, our counterparty is CIMB in Malaysia, so that is often less of an issue anyway because they are very aware of this problem. But there are not many providers.”
Those who offer Shariah-compliant forward contracts have had to split whatever they might be doing on the speculative side from the risk management side and put a formal Chinese wall in place to satisfy the requirements of Shariah law
Currency hedging helps the fund reduce risk for members. Crescent Wealth has a relatively low allocation to Australian equities at seven to 10 per cent, resulting in a higher allocation to global equities and subsequently a higher allocation to foreign currencies.
Now that it can hedge its exposure to foreign currencies, it can better mitigate volatility in its overseas allocations.
“It is good for us to have hedged global equities to counter that lower exposure to equities domestically. So that is all in place and we are building the allocation through time,” Hazell says.
Crescent Wealth is continuing to look at new asset classes it can invest in, but any further addition is still some way off, he says.
“We have asset classes that we can invest into and that we are investigating at the moment. For example, Shariah-compliant private equity is something that we would love to do, but that is something that is further down the line. As our asset base grows, we will be able to do more,” he says.
Crescent Wealth also appointed a new asset consultant in April, awarding the contract to Mercer. Previously, the fund used only bfinance as its asset consultant and it will continue to use it in addition to Mercer, Hazell says.
“We appointed Mercer to be our asset consultant. They’ve actually got a Shariah research department within the group. We are starting to tap into that to make sure that we are thinking about things as sophisticated as possible,” he says.
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.