Beyond Bonds: Unlocking Sukuk's Potential in Hedge Fund Portfolios Amidst Market Volatility, an ARCH and GARCH Models Analysis

Abstract

The global financial ecosystem, which is fraught with economic uncertainty and turbulent bear markets, drives hedge funds to seek for alternative investment opportunities that promise stability and substantial returns. In this context, the potential of Sukuk, an Islamic alternative to conventional Bonds, is examined in comparison to Bonds, particularly during bear markets. Despite abundant research on Sukuk and conventional Bonds, a quantitative comparison analysis, particularly one focusing on GCC Sukuk, remains relatively unexplored. This work fills this need by modelling the financial time series of these instruments using the Capital Asset Pricing Model (CAPM) and Autoregressive Conditional Heteroskedasticity (ARCH) and its generalized counterparts (GARCH & EGARCH). Preliminary findings indicate that Sukuk, due to their asset-backed nature, demonstrate exceptional resilience during economic downturns. Because of their low market sensitivity, Sukuk have the ability to diversify hedge fund portfolios, according to the CAPM model research. In addition, the GARCH and EGARCH models revealed a divergence in volatility patterns between Sukuk and Bonds between 2020 and 2023, emphasizing Sukuk's resilience to negative shocks. To summarize, while Sukuk looks to offer various advantages over conventional Bonds, particularly in bear markets, financial practitioners are recommended to take a balanced approach, always re-evaluating their investment strategies in the ever-changing finance landscape.