Bernd Scherer, a professor at EDHEC Business School, wrote an article in the Winter 2011 issue of the Journal of Alternative Investments about Sovereign Wealth Funds (SWFs). Most of the largest SWFs (8 of the top 10) are funded by oil revenues and need to diversify their asset base. The funds try to find an optimal investment portfolio. The author concludes that the asset allocation should include an equity growth and oil price hedging positions. To hedge oil assets, the SWFs should use fixed income or hedge fund investments as they are negatively correlated. Funds that have low financial assets compared to their physical assets should have a more risky asset allocation. Those SWFs in the opposite situation should be more conservative in their asset allocation.
You can access the article for details, charts and exhibits here.
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