Tuesday, Jun 29, 2010

("=Asian, Middle Eastern Sovereign Funds Plan Own Hedge Funds," published at 2:06 PM EDT, incorrectly implied that Temasek Holdings had been contacted for comment, in the third paragraph. The correct version follows:) 


 
   By Amy Or 
   Of DOW JONES NEWSWIRES

Several Asian and Middle Eastern sovereign-wealth funds, including those of China and Dubai, are planning to create their own hedge funds to seek better returns on their nations' accumulated wealth, two people familiar with the situation said.

One of these people said South Korea's Korea Investment Corp. and Singapore's Temasek Holdings are two other sovereign-wealth funds setting up their own shops with assets ranging between $1 billion and $4 billion. In setting up hedge-fund managers, the funds are deviating from their usual practice of investing in private-equity deals and hedge funds or directly taking a stake in fund-management companies.

A China Investment Corp. spokeswoman said she wasn't aware of the matter, while Korea Investment and Investment Corp. of Dubai declined to comment.

The move by some of the world's largest sovereign-wealth funds to set up their own hedge-fund operations is bold since sovereign funds have little experience in alternative investing. Still, their transition from client to competitor, at a time when fundraising has proven difficult, could have a lasting effect on the hedge-fund industry.

Sovereign funds are still suffering from poor investment results over the past few years after investing in big Wall Street names such as Morgan Stanley (MS), Citigroup Inc. (C) and Blackstone Group LP (BX). The Abu Dhabi Investment Authority late last year sought arbitration after losing billions of dollars on an investment in Citigroup.

Sovereign funds have also taken their lumps investing in hedge funds. "The funds are not happy with the way they had been treated," said one of the people familiar with the situation. "They are now disillusioned with fund of funds investments and would like to bring in their experts and run their own show."

The sovereign-wealth funds are in varying stages of creating their own hedge-fund management companies. Some already have whole teams in place, while others are still scouting for talent, he said.

One hedge-fund manager, which will focus on trading listed equities, has set up offices with around 50 staff in New York, London and Hong Kong. Another has put up research analysts globally, but the decision-making would take place back home, said a person familiar with the situation.

The start-ups are mostly multistrategy funds, allowing them to deploy a variety of investment strategies simultaneously across a broad range of assets: equity, interest rate and currency markets. As a result of the diversification, the risk of multistrategy funds is generally lower than equity-market risk.

The amount allocated to these funds is a drop in the bucket compared with the hundreds of billions of dollars in Asian and Middle Eastern sovereign funds, accumulated mostly from years of balance-of-payment surplus or natural-resources revenues. China Investment Corp. has $300 billion in assets, while Temasek has more than $120 billion.

"Some funds have expressly said they will increase the amount allocated by multiples of the initial amount if operations prove successful," a second person said.

Until now, sovereign funds' investments have been geared towards long-term holdings of financial institutions and overseas energy and resources assets. Their returns have been seriously hurt by the financial crisis.

Singaporean investment vehicle Government of Singapore Investment Corp., which manages funds in excess of $100 billion, disclosed a 3% allocation in hedge funds, or what it called "absolute return strategies," in the year ended March 2009. It didn't mention whether it has its own hedge-fund talents.

Other funds mostly turned to external managers for hedge-fund investments. CIC selected Morgan Stanley and Blackstone to oversee hundreds of millions of dollars in new private-fund investments, other people familiar with the situation said last year. CIC also invested nearly $10 billion in total in the two companies' stock at the height of the economic boom, and their values have yet to return to the level at which CIC invested.

CIC's chairman, Lou Jiwei, told People's Daily, the Chinese communist party's newspaper, in October that he will seize beneficial investment opportunities within reasonable risk levels, amid domestic backlash of poor investment return.

-By Amy Or, Dow Jones Newswires, +1-212-416-3142; amy.or@dowjones.com

(END) Dow Jones Newswires

29-06-10 2153GMT