China Investment Corp., the nation’s sovereign wealth fund, favors larger hedge funds when selecting external managers for investing its capital, said Hua Fan, head of fixed-income investment at CIC.
CIC, which helps China manage the world’s largest foreign-currency reserves, will avoid “over-diversification” by investing in too many funds, Fan said at an annual conference of the Chinese Finance Association in New York yesterday.
The $482 billion fund posted a 4.3 percent loss on its overseas investments last year, its worst performance since the Beijing-based company was set up in 2007, as declines in global commodity prices roiled the value of its resources-heavy portfolio. Alternative investments, which include hedge funds and private equity, surged almost 40 percent in 2011, according to the company’s annual report released in July.
“We tend to invest in large market funds because of our own size; small funds probably cost us the same amount of work,” Fan said. “With CIC’s unique position, we do have great access to hedge funds and can negotiate for lower fees.”
Investors are facing challenges from volatile markets and lower returns on investments such as fixed income, prompting them to diversify in to hedge funds, Fan said.
“We do face growing challenges,” Fan said. “People all think equities are too volatile. Bonds don’t give you 5 percent return. So what we do? Lots of funds put money into hedge funds.”
While CIC’s equity investments suffered losses as global markets plunged, its bond and credit product holdings generated “relatively good returns” last year, CIC said in the annual report, without providing details. Most of its investment portfolios achieved positive returns and outperformed relevant benchmarks, it added.