Risk and Return Characteristics of Islamic Equity Funds

28 Pages Posted: 27 Dec 2008 Last revised: 24 Jun 2011

See all articles by Roman Kräussl

Roman Kräussl

Universite du Luxembourg - Department of Finance; Hoover Institution, Stanford University

Raphie Hayat

Utrecht University

Date Written: December 26, 2008

Abstract

Islamic equity funds (IEFs) differ fundamentally from conventional equity funds since Muslims are prohibited to invest in certain companies/sectors and pay or receive interest. This paper analyzes the risk and return characteristics of a sample of 145 IEFs over the period 2000 to 2009. Our results show that IEFs are underperformers compared to Islamic as well as to conventional equity benchmarks. This underperformance seems to have increased during the recent financial crisis. We also find that IEF managers are bad market timers. They try to time the market, but in doing so, reduce the return rather than increasing it. An important implication of our results is that Muslim investors might improve their performance by investing in index tracking funds or ETFs rather than to invest in individual IEFs.

Keywords: Islamic equity funds; risk-return characteristics; alternative investments; ethical investing; Islamic finance

JEL Classification: G11

Suggested Citation

Kraeussl, Roman and Hayat, Raphie, Risk and Return Characteristics of Islamic Equity Funds (December 26, 2008). Emerging Markets Review, Vol. 12, No. 2, 2011, Available at SSRN: https://ssrn.com/abstract=1320712

Roman Kraeussl (Contact Author)

Universite du Luxembourg - Department of Finance ( email )

L-1511 Luxembourg
Luxembourg

Hoover Institution, Stanford University ( email )

Stanford, CA 94305
United States

Raphie Hayat

Utrecht University ( email )

Kriekenpitplein 21-22
Utrecht, 3584 EC
Netherlands

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