“The European debt crisis is causing investors to dramatically increase their estimates of sovereign risk. But another part of the sovereign universe is taking on risk rather than fomenting it.
Sovereign wealth funds have been diversifying their portfolios away from cash and moving into equities and alternative investments, the International Monetary Fund reports in its latest Global Financial Stability Report. Sovereign funds, like many institutional investors, appear to be moving out on the risk curve in a search for returns in today’s low interest rate environment. Australia’s Future Fund and China Investment Corp. reduced their cash holdings by more than 50 percent between December 2007 and December 2010, and increased allocations to equities, alternatives and bonds.
When these sovereigns say “risk on,” the world may be able to breathe a little easier. ”
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