Sovereign Funds Turn Away From Hedge Funds

Feb 9 2012 | 3:54am ET

More and more hedge funds are looking to sovereign wealth funds to bolster their assets. But they may be looking in the wrong place.

While sovereign funds continued to increase their assets last year, they didn't put that new money into hedge funds, according to a new study from TheCityUK. Overall portfolio allocations to hedge funds decreased, as did the overall number of sovereign funds investing in the asset class, which dropped slightly from 37% to 36%.

"In 2011, overall direct investments of SWFs were about a quarter below the previous year's levels and down about 40% on the peak in 2009," TheCityUK researcher Marko Maslakovic said. "There is more diversification, transaction sizes are smaller and SWFs have increased allocation to emerging market countries."

"They are also focusing more on their own domestic markets," Maslakovic continued. And worse, "the more cautious approach to investments may very well continue in the forthcoming period."

Sovereign fund assets rose 9% to $4.8 trillion last year and are expected to grow by a further $400 billion this year.

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