Sovereign wealth funds look to alternatives, ILS expected to feature

by Artemis on July 2, 2014

The risk appetite of sovereign wealth fund investors is rising, according to a recent survey, with the expected result being a continued increase in allocations to alternative asset classes including insurance and reinsurance linked investments.

A report from Invesco shows that in 2013 sovereign wealth investors ploughed more money into alternative asset classes and hedge fund strategies, with alternatives being the recipients of the highest amount of new allocations in 2013, as they also were in 2012.

Invesco, who surveyed 52 sovereign wealth fund managers who between them control $5.7 trillion of assets, expects this trend to continue as sovereign investors are typically underweight alternatives but increasingly view them as a strategic allocation.

Sovereign wealth funds have been undergoing a strategic change of direction in recent years which has seen them increase their exposure to risk while allocating more capital to alternatives as part of efforts to meet long-term investment return targets.

Invesco said that this is not a quick process. Many sovereign wealth funds upped their allocation targets to alternative investments at least five years ago. However achieving the allocation target can take time, with many sovereign investors still adjusting portfolios to reach their new balance of traditional to alternative asset classes.

Invesco explained that sovereign wealth investors generally expect to continue increasing allocations to alternatives in 2014, something which could be good news for the insurance linked securities, catastrophe bond and reinsurance linked investment market. With their long-term investment horizon, sovereign wealth investors make good partners for reinsurance business and the low correlation of catastrophe and reinsurance assets provides a valuable source of return for sovereign portfolios.

The survey results show that hedge funds remain a focus area and further growth in terms of allocations to hedge fund alternatives are expected from sovereigns in 2014. Again this should present opportunities, to ILS and reinsurance linked investment managers, to build relationships with large, sovereign wealth fund investors.

Artemis spoke with one sovereign wealth fund manager this morning, who while preferring not to be named, said that his fund is seeking to increase its allocations to asset classes that offer a benefit, or some additional quality, to their overall portfolio. As a result of this, ILS and reinsurance is particularly attractive to his fund at this time and they are going through a due diligence exercise with a number of ILS and reinsurance linked managers to identify the appropriate strategies to allocate to.

He explained that ILS and reinsurance is expected to be a long-term component of the sovereign fund. Having put a significant effort into understanding the ILS asset class, getting to grips with which strategies are attractive to it and building relationships with ILS managers, his fund would not expect it to be a short-term allocation.

These large, institutional investors command significant amounts of assets and in some cases have even longer term investment horizons than typical corporate pension fund investors. As a result sovereign wealth funds make good partners for the ILS market, with the ability to provide significant capital to the right strategies and with a willingness to enter the asset class for the long-term, not as a speculative short-term investment.

As we wrote here recently, for many investors a high return is not the only reason for looking at alternative asset classes and hedge funds, such as ILS. Sovereign wealth investors fall into this category of large investors with a long-term view who are looking for something more than just a high return, preferring to allocate to an asset class which provides them with an overall portfolio benefit. Something that ILS and reinsurance linked investments are ideal for.

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