EDHEC Encourages Sovereign Wealth Funds to Revise Investment Approach

With the growth of sovereign wealth funds likely to continue and expected to reach around $10 trillion within the next decade, a new paper by EDHEC says these investment vehicles should improve their investment policies and risk management practices.

(November 24, 2010) — A newly released paper by EDHEC recommends that sovereign wealth funds should revise their investment approach.

“While many sovereign funds were built on the idea that they could hold on to investments over long time horizons, some have had to draw back from investments abroad, even if they are marked at a loss at the time, in order to finance investments in their home country,” wrote the paper’s lead author, Lionel Martellini, a professor of finance at EDHEC Business School and scientific director of EDHEC-Risk Institute.

The report noted that the rapid growth of sovereign wealth funds, which currently have assets of more than $3 trillion, or more than twice the estimated size of the world’s hedge fund industry, pose a series of challenges for the international financial markets and for sovereign states. Specifically, the report recommended that the investment strategy for sovereign wealth funds should involve a performance-seeking portfolio (typically heavily invested in equities), an endowment-hedging portfolio, and a liability-hedging portfolio (heavily invested in bonds).

The paper, funded by Deutsche Bank and titled “Asset-Liability Management Decisions for Sovereign Wealth Funds,” found that sovereign wealth funds should divide their investments into returns-seeking and hedging portfolios tailored to their income from — and payouts to — their state sponsors. The paper compared this approach to the liability-driven investing paradigm developed in the pension fund industry, where it is perfectly recognized that hedging out the impact of risk factors on liability values is the first priority when designing asset allocation strategies, Martellini told aiCIO.

For more stories like this, sign up for the CIO Alert newsletter. 

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

The co-founder of New York-based Quadrangle Group Steven Rattner has said Attorney General Andrew Cuomo's lawsuit in a pension-fund kickback case is “close to extortion.”

(November 23, 2010) — Steven Rattner, co-founder of Quadrangle Group LLC, has said the pension lawsuit by New York Attorney General Andrew Cuomo in New York is “close to extortion.”

On Monday, Rattner, who last week called Cuomo a “bully,” told talk show host Charlie Rose that the attorney general had issued “threats” against him and filed a “politically motivated” $26 million lawsuit against him on the basis of emotions as opposed to facts. Furthermore, he questioned whether the soon-to-be New York governor has the right attributes to even hold an elected office.

Last week, Rattner agreed to pay $6.2 million and accept a two-year ban to settle a probe by the US Securities and Exchange Commission over an influence-peddling scandal in connection with the $124.8 billion New York State Common Retirement Fund. The same day, Cuomo sued Rattner, seeking $26 million for allegedly paying kickbacks to win investment business for his firm from the New York state pension fund. Additionally, Cuomo seeks to ban Rattner from the securities industry. According to an SEC complaint filed in Manhattan federal court, in 2005 and 2006, Rattner and Quadrangle won $150 millions in investments from the New York state pension as a result of a pay-to-play scheme.

Following Cuomo’s suits, Rattner denied wrongdoing, saying that he intended to clear his name “by defending myself vigorously against this politically motivated lawsuit,” he said. “While settling with the SEC begins the process of putting this matter behind me,” he told ABC News. “I will not be bullied simply because the Attorney General’s office prefers political considerations instead of a reasoned assessment of the facts.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

In the wake of its bruised reputation as a result of its association with New York state’s public pension, Quadrangle is reportedly planning a top-to-bottom overhaul, including a new name, new leadership and a new investment focus, the New York Post reported.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742