Ryada Capital Investment Company, based in Kuwait, said this weekend that it is designing a hedge fund that will comply with Islamic law. The fund will carry an initial value of $100 million and will target low-risk investments. Fund managers hope to increase the size of the fund to $300 million within the next three years.

The fund will scarcely employ short selling or other speculative strategies. The law of Islam forbids both gambling and lending on interest, and the jury remains out on whether short-selling counts as either, so the practice will be "limited." Ryada Chief Executive Jamal Al-Saeed told Reuters that short selling will only be used "in case we need it," adding "speculation happens, it's human nature. But it's not the essence of the fund."

With the introduction of this fund, Ryada hopes to benefit from building demand for Islam-friendly investment vehicles, as Muslims seek to park their funds in investments that correspond to their beliefs. Barclays Capital is also reportedly at work on hedge funds that respect Islamic laws.

HSBC will hold all of the fund's assets ... the minimum subscription currently stands at $1 million.

Beth Gaston Moon is an analyst at Schaeffer's Investment Research.