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Hedge Fund Investor in Focus: Sovereign Wealth Funds

by Graeme Terry

  • 16 Apr 2012
  • HF

Sovereign Wealth Funds (SWFs) are a unique investor group in the institutional universe due to the substantial assets under management associated with such funds, as well as their different investment horizons and demands. In recent years this investor group has become more prominent in the hedge fund investor universe as a number of these institutions have made maiden forays into the asset class.

The overall assets under management of SWFs have been steadily growing over the past few years and even over the past year aggregate assets have grown from $3.98tn in 2011 to $4.62tn today. At present 38% of SWFs are known to be investing in hedge funds, which is a slight increase on the 36% that were investing in 2011. Many of these investors are newcomers to the asset class, however they have become comfortable investing in other alternatives such as private equity where the proportion of SWFs investing is closer to 60%. Consequently it is expected that this trend will be replicated for hedge funds over the next few years as more of these institutions invest in hedge funds for the first time.

The majority of SWFs which do invest in hedge funds are willing to invest in a wide range of hedge fund strategies in order to diversify their existing portfolios of investments. Despite this, these investors tend to have a preference for more transparent strategies that are easier to understand such as long/short equity and global macro with 50% and 41% of institutions having a preference for these strategies respectively. In contrast distressed funds are less popular with SWFs when compared with other investor groups such as public pension funds as many feel that these do not offer the required level of transparency. In general, SWFs have a global outlook when investing in hedge funds, with 92% indicating that they will invest in the asset class on a global scale.

In terms of structural preferences amongst SWFs, funds of hedge funds are currently more popular than single manager hedge funds with 35% investing solely through multi-manager vehicles compared with 15% that make all of their investments directly. This indicates that many SWFs remain relatively inexperienced in the asset class and as a result they favour the diversification and industry experience offered by funds of hedge funds. Despite this, 50% of investors indicate that they include a mixture of single managers and funds of hedge funds in their portfolio and this is usually typical of investors in a transition period from multi-manager portfolios to direct investments. As a result it is likely that the proportion of SWFs investing directly will increase over the next few years and it is expected that this will become the structure of choice in the future.

There is plenty of evidence that suggests that interest in hedge funds is growing amongst SWFs and this could result in new allocations from these investors over the coming years. SWFs will be of interest to hedge fund managers due to the vast sums of capital they can potentially invest. These managers have the opportunity to attract substantial capital from this investor group providing the industry can increase its understanding of the SWF space.

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