Sovereign wealth funds have become increasingly active in the hedge fund space, with a steadily increasing allocation to the asset class, notes Preqin.
In its June 2015 Hedge Fund Spotlight report titled: “Sovereign Wealth Funds Investing in Hedge Funds”, Preqin highlights that during stock market volatility, hedge funds offer a favorable alternative in offering uncorrelated returns to traditional markets and opportunities worldwide.
Sovereign wealth funds have longer investment horizon
The Preqin report points out that though sovereign wealth funds constitute less than 1% of all investors in hedge funds, they represent about 11% of all capital invested in hedge funds by institutions. As sovereign wealth funds have fewer short-term liabilities, they typically seek investments with a longer investment horizon compared with other institutions. Thus, the twin effect of large ticket sizes and long-term investment horizon of sovereign wealth funds offer a “game changer” opportunity for a hedge fund manager.
As set forth in the following graph, nearly 33% of sovereign wealth funds currently have an allocation to hedge funds, increasing from 31% in 2013.
However, despite the steady increase in allocation, the asset class is still utilized only by a small proportion of sovereign wealth funds compared to other alternative asset classes. Interestingly, the Preqin report highlights that some sovereign wealth funds, such as National Development Fund of Iran, consider hedge funds too risky for their conservative investment approach.
Slicing the data further in terms of sovereign wealth funds investing in hedge funds by location, you cam see that sovereign wealth funds located around the world invest in hedge funds, though they are prevalent in Asia (28%), North America (24%), and the Middle East (24%).
Interestingly, many sovereign wealth funds such as Abu Dhabi Investment Authority, Alaska Permanent Fund Corporation (APEC), Kuwait Investment Authority have been investing in hedge funds for over a decade. Moreover, some of the investors, such as APEC and Texas Permanent School Fund State Board of Education, typically commit between $300 million and $1 billion to new hedge funds.
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