SWFs As Investors In Hedge Funds

By Hedge Fund Insight staff

As Sovereign Wealth Funds (SWFs) have grown in number and AUM they have become more significant to the hedge fund industry. According to data from Preqin, assets managed by SWFs are up 76% in the last 5 years as existing funds  have grown, and new funds have been formed. Total assets across all SWFs is estimated to be $5.3 tn, up a cool $750bn in this year alone.

As with any institutional investors, the appetite for alternative assets is partly a function of seasoning – the length of time the operation has been established. Like a pension plan, SWFs typically look to add alternatives after having established  and implemented investment policies (and so asset allocations) across traditional assets.

At the moment nearly a third of SWFs invest in hedge funds, or are considering doing so.

source: Preqin

Typically a SWF will invest in hedges both directly and via a funds of hedge funds. However the route taken is changing, just as it is for other investing institutions. A year ago 64% of SWFs that invest in hedge funds selected single manager funds directly and used a fund of funds. Today that figure is 57%.  And the proportion that invest solely through funds of funds has declined over the last year too – from 35% to 24%.

source: Preqin

Sovereign Wealth Funds can  secure very good terms from their hedge fund managers. Improved liquidity and transparency are often granted, and fees are often discounted. As clients, SWFs give advantages to hedge funds – they write the biggest tickets, and the investment horizon of the Funds is very long, so capital allocations have a good chance of remaining stable.  SWFs have invested in hedge fund strategies via commingled and offshore funds, but there is an increasing bias by SWFs towards managed account structures and funds of one.