Future Fund of Australia Shifts Investment Strategy Towards Hedge Funds Amid Geopolitical Uncertainty

Australia's sovereign wealth fund, the Future Fund, is shifting away from government bonds as a means to diversify its equity holdings and towards hedge funds to manage risk. The fund, valued at A$223 billion, believes that geopolitical tensions will drive higher inflation and volatility, leading to bonds no longer providing reliable diversification. The fund intends to invest in equity market-neutral, systematic macro, and commodity-focused hedge funds, as well as other alternative asset classes, to hedge against volatility and diversify risk.

The Australian sovereign wealth fund, the Future Fund, is repositioning its investment strategy to minimize reliance on government bonds and boost equity holdings through hedge funds [1]. This shift is driven by the fund's anticipation of higher inflation, interest rates, and volatility due to geopolitical tensions and the potential for a stronger correlation between stocks and bonds.

The Future Fund, valued at A$223 billion, is planning to invest in various hedge fund strategies, such as equity market-neutral, systematic macro, and commodity-focused funds [1]. The fund's Chief Investment Officer, Ben Samild, believes that these hedge fund strategies have historically performed well, particularly during times of changing inflation [1]. In addition to hedge funds, the Future Fund is considering investments in alternative asset classes, such as commodities, volatility investing, and trend-following portfolios, to further diversify its risk [1].

Equities currently make up 37.2% of the fund's assets, and the Future Fund has been a proponent of alternative assets. Hedge funds have typically accounted for between 10% and 20% of its portfolio, with private equity, venture capital, unlisted infrastructure, and property together making up over 40% [1]. The Future Fund outsources billions of dollars to some of the world's largest alternative asset managers, such as Man Group, Citadel, Blackstone Inc., and Brookfield Corp [1].

Samild emphasizes that the Future Fund values strong partnerships with its hedge fund managers and does not anticipate a significant increase in the number of hedge funds it works with [1]. This approach allows the fund to access high-quality managers and secure better investment terms.

Moreover, the Future Fund anticipates a further shift in global trade dynamics, driven by governments prioritizing economic resilience over cost efficiency [1]. This could result in supply chains becoming closer to home countries and the support of domestic manufacturing in high-tech areas such as semiconductors [1].

In summary, Australia's Future Fund is adapting its investment strategy to reduce exposure to government bonds and increase equity holdings through hedge funds. This shift is a response to the anticipated impact of geopolitical tensions on global trade, inflation, and the relationship between stocks and bonds. By diversifying its portfolio through hedge funds and alternative asset classes, the Future Fund aims to manage risk more effectively.

References:
[1] Bloomberg. (2023, February 3). Australia wealth fund picks hedge funds over bonds to weigh risk. Retrieved from https://www.bnnbloomberg.ca/australia-wealth-fund-picks-hedge-funds-over-bonds-to-weigh-risk-1.2090523