South Korea SWF Aims to Boost Alternatives Allocation

(July 19, 2011) — South Korea’s sovereign wealth fund is aiming to expand its allocation to alternative investments.

According to the Korea Investment Corporation (KIC) CEO Choi Chong-suk, the $46 billion fund — South Korea’s government-owned investment management company — will continue to actively invest oversees, possibly joining deals with other global sovereign wealth funds, Reuters has reported. While the KIC still has roughly 80% of its portfolio in stocks and bonds, it is aiming to diversify its investments.

In the Spring issue of aiCIO Magazine, Scott Kalb, the Chief Investment Officer of the KIC, described the fund’s embrace of alternatives: “We divide our assets into traditional, alternative, and strategic investments. Broadly speaking, the KIC was only investing in traditional asset classes in its early stages. It’s important to build a portfolio with as many uncorrelated return streams as possible…Our biggest initiative in 2009 was the launch of the alternative investment program—introducing private equity, hedge funds, real estate, and commodities…At this stage, we’re about 15% in the alternative/strategic space and 85% in public markets. Normally, when you get involved in alts, there’s a ‘J-curve effect’ as it takes a while to get performance—but,interestingly, all our alternative and strategic investments are moneymaking, even at this early stage, which is unusual.”

The fund’s move toward the alternatives space follows a March report by Preqin, that found that sovereign wealth fund assets have swelled 11% in the past 12 months to about $4 trillion, fueled largely by intensified alternative investment programs.

“Following global economic stabilization, many sovereign wealth funds that had delayed plans to diversify their holdings as a result of the economic downturn have now resumed these plans,” Sam Meakin, Managing Editor of the 2011 Preqin Sovereign Wealth Fund Review, said in a release. “Therefore we expect the proportion of SWFs moving into the various alternative asset classes, as well as the amount invested by SWFs in alternatives, to continue to increase in the coming year. The significant collective assets under management of SWFs means that they represent an important potential source of capital for fund managers across all asset classes.”