I am planning on studying economics or finance. Now my question is, Is working in HEDGE FUNDS and Investments banks halal or haram? i'm not talking about the IT or technical works, i'm talking about working in these institutions on financial positions. for instance, working on the sales and trading side of investment banks or working as a associate in a Hedge fund. Here maybe i'll not be dealing derectly with riba but my work may involve other grey areas. It would be really helpful if we finance students could get the clarification since most lucrative or productive side of employement for a finance student would be Investment banks or hedge funds.
P.S: please do not confuse investment banks with conventional banks.
[1]An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.
[“Hedge Fund”, Investopedia, accessed on February 4nd, 2014,
http://www.investopedia.com/terms/h/hedgefund.asp]
The advisory divisions of investment banks are paid a fee for their services, while the trading divisions experience profit or loss based on their market performance. Professionals who work for investment banks may have careers as financial advisers, traders or salespeople. An investment banker career can be very lucrative, but it typically comes with long hours and significant stress.
Because investment banks have external clients but also trade their own accounts, a conflict of interest can occur if the advisory and trading divisions don’t maintain their independence (called the “Chinese Wall”). Investment banks’ clients include corporations, pension funds, other financial institutions, governments and hedge funds. Size is an asset for investment banks. The more connections the bank has within the market, the more likely it is to profit by matching buyers and sellers, especially for unique transactions. The largest investment banks have clients around the globe.
Investment banks help corporations issue new shares of stock in an initial public offering or follow-on offering. They also help corporations obtain debt financing by finding investors for corporate bonds. The investment bank's role begins with pre-underwriting counseling and continues after the distribution of securities in the form of advice. The investment bank will also examine the company’s financial statements for accuracy and publish a prospectus that explains the offering to investors before the securities are made available for purchase.
[“Investment Bank - IB”, Investopedia, accessed on February 4nd, 2014,
http://www.investopedia.com/terms/i/investmentbank.asp]
A hedge fund is basically a fancy name for an investment partnership. It’s the marriage of a fund manager, which can often be known as the general partner, and the investors in the hedge fund, sometimes known as the limited partners. The limited partners contribute the money and the general partner manages it according to the fund’s strategy. A hedge fund’s purpose is to maximize investor returns and eliminate risk, hence the word “hedge.” If these objectives sound a lot like the objectives of mutual funds, they are, but that is basically where the similarities end.
The name “hedge fund” came into being because the aim of these vehicles was to make money regardless of whether the market climbed higher or declined. This was made possible because the managers could “hedge” themselves by going long or short stocks (shorting is a way to make money when a stock drops).
Key Characteristics
1. Only open to “accredited” or qualified investors: Investors in hedge funds have to meet certain net worth requirements to invest in them – net worth exceeding $1 million excluding their primary residence.
2. Wider investment latitude: A hedge fund’s investment universe is only limited by its mandate. A hedge fund can basically invest in anything – land, real estate, stocks, derivatives, currencies. Mutual funds, by contrast, have to basically stick to stocks or bonds.
3. Often employ leverage: Hedge funds will often use borrowed money to amplify their returns. As we saw during the financial crisis of 2008, leverage can also wipe out hedge funds.
[Gad, Sham, “What Are Hedge Funds?”, Forbes, accessed on February 4nd, 2014, http://www.forbes.com/sites/investopedia/2013/10/22/what-are-hedge-funds/]
[2] Late 1999 saw the repeal of the Depression-era Glass-Steagall Act, marking the deregulation of the financial services industry. This now allowed commercial banks, investment banks, insurers, and securities brokerages to offer one another’s services.
As such, many investment banks now offer retail brokerage (retail meaning the customers are individual investors rather than institutional investors) as well as commercial lending. For example, today you can open a checking account with JP Morgan via its Chase brand, while JP Morgan offers investment banking services and asset management. Until 1999, one financial institution providing all of these services under one roof was technically not allowed (although many post-enactment loopholes basically neutered the law long before 1999).
[“Retail Brokerage and Commercial Banking”, Wall Street Prep, accessed on February 4nd, 2014, http://www.wallstreetprep.com/knowledge/retail-brokerage-and-commercial-banking/]
