Exploring portfolio diversification opportunities through venture capital financing

Increasingly Islamic financial institutions are being pressured by critics to offer profit and loss sharing (PLS) financing for the purpose of entrepreneurial development. We believe the growth of PLS can be incentivized by increasing the participation of Islamic asset managers and mutual funds in this sector. To achieve this we are conducting an exploratory study to link PLS investments with portfolio optimization opportunities for these asset managers. Through our studies we were able to determine that there was indeed a portfolio optimization opportunity for fund managers who invested in PLS investments over the long run. We conducted our analysis using recently established techniques of dynamic conditional correlation and modified discrete wavelet transformation. We hope this exploratory study will lay down the foundation for more studies to be conducted, to help industry practitioners and policy makers to adopt this product