A Summary of Sovereign Wealth Funds and Their Alternative Investments

As of October 2013, the total assets under management for sovereign wealth funds was estimated in the Preqin 2014 Sovereign Wealth Fund Review to be $5.38 trillion.  The entire alternative investments universe has $5.5 trillion in AUM.  To sum up, these are national investment funds originating from foreign exchange/ reserve assets or revenues from commodities, especially oil.  They are used to diversify the country's economy from oil, maximize their return on revenues and stabilize their economy despite the volatility inherit in commodities.

More and more funds are being created.  66% of the funds were launched since 2000.  Asia and Middle East North Africa, an investing region known as MENA, have 47% of the sovereign wealth funds with 67% of AUM.  These regions have large natural resources i.e. oil and include China, which has a huge US dollar reserve balance to stabilize the yuan to dollar currency rate.  These funds are continuing to grow and allocate to alternatives.  Below are some findings from the report:

• 31% invest in hedge funds.  They are trending towards direct investments and away from fund of funds - as is everyone else.  The most popular strategies are distressed, equity long/short and global macro.
• 51% invest in private equity with 7% investing directly.  The most popular strategies are leveraged buyout and venture capital.
• 54% invest in real estate with most doing direct investments.  The most popular strategies are opportunistic and value added.
• 57% invest in infrastructure.  Of these investors, 34% invest directly only and 50% invest directly and by using funds.

Hedge Funds Replace Mutual Funds

Hedge fund and fund of funds managers have been adding long-only as an investment strategy according to an article in the December 23, 2013 issue of Pensions & Investments.  These include such famous names as CQS, Lansdowne Partners, Lone Pine Capital, Maverick Capital, Tiger Global Management, Viking Global Investors, Winton Capital Management, Blackstone Alternative Asset Management and the Rock Creek Group.  The new strategy has been driven by institutional investors - of which, 44% invest in long-only funds.  The interest has been fueled by several other factors:

• Institutional investors' disappointment with mutual fund returns
• Since the financial crisis of 2008, shorting securities has been underperforming as an investment 
• strategy
• Confidence in hedge fund managers as stock pickers
• Performance fees are easier for the manager to attain as they are based on returns relative to the performance of an index i.e. S&P 500

Blackstone and Rock Creek have almost $7 billion in assets under management (AUM) in the long-only strategy.  Both companies launched the strategy a few years ago.  In 2007, Blackstone used hedge fund managers to trade the long-only components of one of Blackstone's commodity indices.  In 2009, Rock Creek launched an emerging markets equity fund.  This fund has grown to $1.8 billion in AUM.