Asian sovereigns lead allocations to hedge funds

Three of the four sovereign wealth funds with the biggest exposures to hedge funds are based in Asia Pacific, and these allocations look set to rise further.
Asian sovereigns lead allocations to hedge funds

Asia-Pacific sovereign wealth funds lead the way in hedge fund investments, with 44% having an allocation to the asset class, against the 25% of their counterparts based elsewhere, indicates a new Preqin report. And such exposure is likely to rise in the coming years, according to SWFs in the region.

On average, 31% of these entities have an allocation to hedge funds, while 54% do not, according to the data provider, which surveyed 72 sovereigns globally for its 2014 Sovereign Wealth Fund Review.

Of SWFs with an allocation to hedge funds that is known, three of the top four – in terms of amount allocated to the asset class – are in Asia Pacific, says Graeme Terry, Preqin’s associate commercial manager of hedge funds.

They are China Investment Corporation (CIC), Australia’s Future Fund and Government of Singapore Investment Corporation. “It is expected that these large entities will continue to seek new hedge fund investments over the coming year,” Terry tells AsianInvestor.

CIC has $600 billion in total assets of which 12.7% is allocated to absolute return strategies. The mainland sovereign has been examining opportunities in European hedge funds, particularly in the distressed space, said Roslyn Zhang, CIC managing director of fixed income and absolute return investments, at Salt Asia conference in late September. 

Meanwhile, figures released by the A$91.7 billion ($86.7 billion) Future Fund in September show that it has a 15.2% allocation to alternatives. Of that, A$10 billion is invested across 18 managers, with another A$3.7 billion run through funds of funds.

Another large sovereign, Korea Investment Corporation, reportedly has about 10% of its $65 billion in assets invested in alternatives, of which hedge funds account for 39% – or roughly $2.5 billion. And chief investment officer Lee Dong-ik told AsianInvestor last year that it plans to boost its exposure to alternatives to 20-25% over the next few years.

It is the bigger, more established sovereign funds that invest in hedge funds, says Terry, and they tend to choose strategies with substantial AUM, given the considerable amount of capital they need to allocate.

He notes that only one sub-$10 billion SWF tracked by Preqin is known to invest in the asset class, whereas 51% of sovereigns larger than $10 billion have a hedge fund allocation. Two-thirds of SWFs with more than $100 billion in assets have exposure to hedge funds.

Of the SWFs that invest in hedge funds, 96% invest in strategies on a global scale, says Terry. Asian sovereigns have a strong emphasis on funds with a domestic geographic focus, as well as to North American funds.

But North American sovereign wealth funds prefer to gain global exposure through established US-based managers, adds Terry.

Long/short equity and macro are the most preferred hedge funds, Preqin’s survey indicates, with each strategy garnering the interest of 52% of sovereigns. They are followed by long/short credit (39%), multi-strategy (39%), distressed (35%), event-driven (35%), equity market neutral (35%) and managed futures (30%).

The level of investment by SWFs into hedge funds is expected to remain at a steady level. Newly established funds have a focus on more conservative investments, while more seasoned SWFs are expected to maintain their level of alternative allocations.

These factors have been attributed to a slowdown in investments to hedge funds from SWFs over the past two years, following a rise in allocations from 2009-11, says Terry.

CIC’s Zhang told Salt Asia delegates that the mainland sovereign found attractive opportunities to invest in hedge funds during the immediate post-crisis era, as favourable fee terms were being offered by large, well-known hedge funds.  

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