The rising price of oil and the emergence of sovereign wealth funds from the Gulf region have focused attention on the growing financial strength of the region and on its rapid emergence as a market for investment products. This has created new opportunities for Jersey because of the island's reputation for professionalism and experience in the structuring and servicing of specialised investment vehicles.

Jersey's name is already well established in the Gulf thanks to corporate and fiduciary business from the region, but the island has also been in the forefront of developments in hedge funds that meet the requirements of Shariah law. This is a particularly complex field because various investment techniques widely employed by hedge funds, including the use of leverage and short selling of stocks, are generally incompatible with the prescriptions of Shariah law.

However, there are various ways of structuring hedge funds in order to ensure their compliance with the requirements of Islam. Promoters have been able to develop funds in partnership with Shariah scholars that offer effective investment techniques while respecting the tenets of the law. Constructive thinking has made it possible to create transactions and structures that have similar economic effects to the use of conventional derivatives.

As a result of these efforts, the number of Islamic hedge funds in the market is growing rapidly, and Jersey has been chosen as the domicile for several of these funds because of its expertise in this field. Structuring a Shariah-compliant fund requires not only general awareness of the principles involved but detailed knowledge on the part of law firms involved in this work. A substantial investment of structuring input is usually required from the lawyers before final approval for conformity is sought from Shariah scholars.

One of the difficulties for some developers of Islamic hedge funds that use a 'black box' approach to creating compliant structures is that one of the fundamental principles of Shariah is transparency. This has raised some questions as to the extent to which some highly complex structures designed to replicate conventional economic effects are fully Shariah-compliant.

In contrast to practice in the traditional hedge fund industry, Shariah investors would expect a substantially transparent product. In future, therefore, Shariah-compliant hedge funds may well be even cheaper to set up than traditional products, because the manager is disclosing much of the product rather than simply the past performance of a black-box model that is kept secret from investors.

Given that many of these black-box models have been found wanting amid the market upheavals of the past year, as well as the new restrictions on pure short selling of financial companies in many markets, the emergence of successful Islamic funds may eventually lead to greater transparency in the hedge fund industry as a whole.

Conventional fund products continue to enjoy a substantial market share in the Middle East, but all the evidence suggests that Shariah-compliant vehicles are growing even faster. Demand for hedge funds is likely to continue to expand in the future as investors in Islamic countries increasingly recognise the benefits of non-correlation, risk reduction and diversification that they can bring to an investment portfolio.

While some Moslems may continue to hold reservations about the compliance of certain hedge fund products, the growth of the market is likely to bring greater consensus among Islamic scholars on techniques that are acceptable under Shariah law and greater certainty for fund promoters and investors alike.

Bill Gibbon is a group partner in the commercial practice at Voisin Advocates