Sovereign funds target alternative investments
Sovereign wealth funds (SWFs) have a heightened demand for alternative investments, notably real estate, private equity and hedge funds, in order to gain better returns, according to a survey by investment management firm Invesco.
The firm reports that respondents describe core assets as ‘unattractive’, following high volatility in the equity markets and a general sense of dissatisfaction with the rate of risk and return on equity investing. Sovereign investors are, on the whole, moving away from equities, bonds and cash in order to invest in alternative opportunities. Over the last 12 months, and in relation to the rest of their portfolios, 69 percent of those surveyed cite a growth in demand for international real estate, 61 percent for international private equity and 40 percent for hedge funds.
Alternative investments currently make up 21 percent of the $6 tn invested by SWFs globally, a value that has increased by 26 percent over the last 12 months. The survey was conducted among 29 funds that are reported to control around 80 percent of the planet’s SWF assets.
Though most SWFs remain stacked in favor of traditional investment, the Middle East and other emerging markets are seeing the largest net swing toward alternative assets. Nine percent of Middle Eastern sovereign investment is now in alternative vehicles – a 69 percent increase over the past year. In the West, alternatives have grown by more than a quarter to make up 21 percent of sovereign investment, while in Asia they comprise 12 percent of current SWFs.
The report suggests that while findings show the outlook for alternative investment managers could be positive, ‘as demand for alternatives grows, we observe a preference for in-house and co-investment structures rather than investment via funds.’
Invesco also notes that respondents are particularly wary of fixed-income returns in a low-interest-rate environment, which might encourage sovereign investors to turn to more flexible alternatives. Accordingly, sovereign investors are reported as expecting an 8 percent annual return from alternative assets, compared with projected returns of 7 percent from equities, 4 percent from bonds and 2 percent from cash.
Beyond the purely financial, many respondents believe there are valid long-term and structural reasons for putting more money behind alternative assets. Invesco notes that many have used different investment strategy benchmarks to arrive at new strategies: 21 percent use risk-premium drivers, for example, and will seek a higher exposure to drivers such as liquidity or growth through alternative investment.