Shariah Compliant Trading using Obsidian’s technology.
Introduction:
Obsidian’s technology is scalable and can be applied across asset classes. It can therefore also be applied just as effectively to Shariah Compliant Stocks.
Shariah Compliant Stocks are not involved in the following activities:
Alcohol
Firearms
Impure Food stock
Usurious Products
Adult Entertainment
Gambling
Tobacco
And they must meet the following financial ratios:
Debt less than 33.33% of total assets
Cash and interest-bearing assets are less than 33.33% of total assets
Accounts receivable and cash are less than 50% of total assets
Total interest and non-compliant activities income cannot exceed 5% of total revenue
Portfolio Setup:
From the available universe of stocks Obsidian’s Shariah Compliant US. Stock Portfolio is comprised only of holdings in the following:
Positions are held for at least one trading day and the results below are achieved without leverage or shorting.
The benchmark portfolio against which Obsidian’s performance is compared is comprised of a passively invested equally weighted basket of stocks.
Returns:
The graph shows Obsidian’s performance against the benchmark portfolio:
The relevant figures are:
Take away points:
Obsidian’s Portfolio outperforms the Benchmark Portfolio in every measurement category.
Most notable is the improved CAGR and lower Volatility resulting in a much higher Sharpe Ratio: 2.4 vs. 1.1.
Obsidian’s Portfolio does suffer drawdowns but in each time frame it outperforms the Benchmark Portfolio
Most notably the worst return in any rolling one-year period was actually +7.6%; it has never suffered a loss over a one-year period.
The following table emphasises the robustness of Obsidian’s Portfolio’s returns; only 4 losing months in the last 36:
Improved Sharpe Ratio:
The graph below shows the rolling Sharpe Ratios for the Obsidian Shariah Compliant Portfolio and the Benchmark Portfolio:
Take away points:
Over the whole period of analysis Obsidian’s Sharpe Ratio is always above that of the Benchmark Portfolio.
This shows that Obsidian consistently utilises risk, in the form of volatility, more efficiently than the Benchmark Portfolio
The average of the rolling Sharpe Ratio for the Obsidian Shariah Compliant Portfolio (3.0) is more than twice that of the Benchmark Portfolio (1.3).
Conclusions:
Obsidian’s technology can be successfully applied to any portfolio of assets, specifically Shariah Compliant Stocks in this case. Obsidian systematically improves Returns, reduces Volatility and therefore increases Sharpe Ratio. Tailored Portfolio can be built upon request.
For a brief description of our technology please see: https://obsidianaiadvisors.com/about-obsidian or contact us for further details.
Faisal Khan (Oct 2019 )