Foreign wealth pours into London\'s hedge funds

Date: Monday, June 30, 2008
Author: Phillip Inman, The Guardian

Foreign sovereign wealth investors are targeting London's hedge fund industry as they seek to boost returns on their vast savings, much of it generated from trade with the west in oil and other commodities.

The hedge funds have seen billions of pounds pour into their investment plans at a time when the industry desperately needs cash to replace debt funding that collapsed during the credit crunch.

According to a survey by the magazine Hedge Fund Manager Week, the rapidly expanding group known as fund of hedge funds are the main beneficiary of investments from sovereign wealth funds. Assets in fund of hedge funds, which spread their investments across a range of individual projects, have grown 10% in the last six months to £700bn.

Fortis Prime Fund Solutions topped the table of funds, with assets under administration of £107bn. Total industry assets have reached £2.2tn, according to the magazine's annual Hedge Fund Assets Under Administration survey.

Sovereign wealth funds act as the investment arms of governments, and in recent years have preferred to make direct investments in high-profile western companies. Last week, Barclays announced that the Singapore government fund Temasek and China Development Bank would increase their commitment to the bank, alongside fresh funds from Qatar's royal family and Japan's Sumitomo Mitsui bank.

China's £100bn sovereign wealth fund wants to allocate more than a third to alternative investments including hedge funds, according to Richard Baker, president of the Managed Funds Association (MFA). He told HFM Week that the China Investment Corporation (CIC) confirmed that $70bn (£35bn) is likely to be split between private equity and hedge funds.

The magazine said sovereign wealth funds were in the process of increasing their allocations to alternatives from 1% to up to 10% of their portfolios.

According to Jennifer Johnson-Calari, director of the World Bank's Sovereign Investment Partnerships, the £15bn Korea National Pension Fund, the Fonds de Retraite in Paris, the Alberta Heritage Fund, Australia Future Funds, New Zealand Superannuation Fund, Canada-based CPP Investment Board and the Thailand Pension Fund are increasing their allocations to alternatives - including private equity, real estate and hedge funds. She added that the £175bn Government Pension Fund of Norway is considering a hedge fund investment.

Part of the attraction of hedge funds is their flexible response to investments and their willingness to target cheap assets. Many hedge funds are now buying "on the cheap" the debt of distressed companies hit by the credit crunch, with a view to selling it at a later date for a profit.

They can generate returns of more than 100% at a time when most financial services firms are signalling a decline in profitability.