Sovereign Wealth Funds Allocating to Alternatives
Sovereign wealth funds (SWF) are government-backed investment vehicles. At the end of 2009, these funds had approximately $3.8 trillion under management.1 Although SWFs have been around for decades, their numbers have increased dramatically in recent years. Of the top 50 funds, 56 percent were launched between 2000 and 2009.2 As this asset pool continues to expand in size and number, so will its importance. According to International Financial Services London, “SWFs are likely to become more important participants in global financial markets over the coming years as inflows from trade surpluses and commodities’ exports continue.”3
Since 2009, SWFs have increased their investments into both private equity funds and hedge funds. The Korea Investment Corp. (KIC), a $35 billion fund, is one such example. According to Scott Kalb, chief investment officer, “The fund plans to double the portion of investments made through stake purchases, private equity deals, hedge funds and property acquisitions to 20 percent of its portfolio.”4 Kalb also stated, “Financial-market turmoil has created considerable opportunities to invest directly in companies, and sovereign wealth funds are ideally placed to inject capital and credibility into sound businesses whose value has fallen.”5
Another example of an SWF increasing its exposure to alternative investments is the Government of Singapore Investment Corp. This “manager of more than $100 billion of Singapore’s foreign exchange reserves, increased its allocation to alternative investments, including private equity, real estate and hedge funds, to 30 percent in the year ended March 31, 2009, from 23 percent a year earlier, according to its latest annual report released in September.”6
Conversations between BHA analysts and SWFs have indicated a similar trend. BHA research analysts have interviewed and obtained investment strategy information from 11 of the 47 largest (based on assets under management) SWFs worldwide. During these conversations, SWFs have expressed their interest in hedge fund and private equity investments. They have also voiced a willingness to invest in riskier and less liquid strategies. This could be due to their ability to invest in strategies that require longer lock-up periods but offer superior returns.
No matter what the reason is, however, if SWFs continue to grow in number and size, it is likely that they will have a noticeable impact on the alternative investments industry.
1,2,3 International Financial Services London, “Sovereign Wealth Funds 2010,” March 2010.
4,5,6 Bloomberg, “KIC to Shift Toward Direct Investments After ‘Flat’ Returns,” August 26, 2010.