UK islamic funds performance - Essay Example

However, despite this permission, the development of Islamic banking sector could not take place and it was only during 20th century that it started to take its roots. It was only after some Middle Eastern countries took the lead when this sector started to develop. The real development of this sector started in later years of last century when countries like Malaysia started a parallel Islamic Banking system focusing on the need for having an alternative system of banking unlike traditional banking system which is based upon usury.

UK is , nowadays, also considered as one of the leading markets for the Islamic banking and other financial products. This study therefore focused on the examination of the performance of UK based Islamic mutual funds between the period of 1999-2009 and comparison with the market benchmark. This study also attempted to explore the impact of financial crisis on the Islamic funds and made a comparison of the impact of crisis on other funds also. Some of the research questions probed under this study therefore include the assessment of under and over performance of Islamic funds, an assessment of the riskiness of Islamic funds as well as the key drivers of returns generated by Islamic funds.

Different performance measures such as Sharpe Ratio, Jensen’s Alpha, Treynor’s ratio and information ratio were used to assess the performance of the funds. Results indicate that UK Islamic funds perform similarly as the market benchmarks with the exception of few which tend to outperform the performance index. Results also indicate that Islamic funds can serve as effective hedges for the equity investors because of their inherent nature of being risk averse. The overall results therefore indicate that Islamic funds do not offer any abnormal risk adjusted reward to the investors and can only provide good investment opportunity specially during bursting period