Heads we win, tails you lose: Is there equity in Islamic equity funds?

•Proportion of alpha statistically attributable to luck measured for Islamic funds•Generally, Islamic equity funds do not outperform market benchmarks.•In limited cases that they do, much is attributable to luck rather than skill.•Findings question equitability of Islamic funds levying charges.•Policy implications — case made for innovation in funds' remuneration structure

We made the first estimate of the proportion of fund alpha statistically attributable to luck rather than skill for a sample of Malaysian Islamic equity funds. Broadly, the funds do not outperform market benchmarks. In the limited instances where performance is superior, based on a contemporary methodology, as much as 47% of the observed positive fund alpha is statistically attributable to luck. Thus, at 5% significance level, we find only 1.95% of our funds to be genuinely skilled. Our findings raise questions regarding the equitability of these funds levying fixed fees, making a case for potential innovation in fund remuneration structure.