China's $930 billion sovereign wealth fund is maintaining its allocations to hedge funds near current levels thanks to their "very high" risk-adjusted returns, even as some investors rail against poor performance and high fees.
Hedge funds have delivered China Investment Corp. a higher Sharpe ratio than any other asset class in its public-market portfolio, said Fan Hua, head of asset allocation at CIC, referring to a measure widely used to gauge a money manager's ability to generate risk-adjusted returns. The Beijing-based firm has about 8% of its overseas portfolio in hedge funds, making it one of the world's largest investors in the industry, she said.
"That's a reasonable size and already very large," Ms. Fan said in an interview in Beijing. "The reason we didn't add too much exposure is mainly because of the limitations of the market — it's not easy for us to find hedge funds that we think are very good to invest in."
CIC's bullishness provides assurance to an industry that has struggled to retain investors in recent years. J.P. Morgan Chase's asset management unit recently pulled out of Manoj Narang's fund as its biggest investor, while disaffection with high fees and lackluster returns have helped push hedge fund openings to the slowest pace in 17 years.
The Chinese fund is seeking to boost direct and alternative investments to at least 45% of the more than $200 billion in its overseas portfolio in the next three years as it reduces exposure to volatile public markets, President Tu Guangshao said in March.
CIC started investing in hedge funds in 2009, when fallout from the global financial crisis helped it gain entry into some top-performing funds that usually limit new money. It gradually built the portfolio to its current size, either directly or through hedge funds of funds.
While funds of funds have lost popularity partly due to higher costs, CIC has been able to negotiate lower fees and the services it receives make the strategy "worth it," Ms. Fan said.
Most of CIC's hedge fund investments have been in firms based in the industry's traditional hubs of the U.S. and Europe, but it's now looking at more opportunities in Asia as the profit contribution from the region was good last year, and more local funds have emerged, she said.