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Optimal asset allocation for sovereign wealth funds

Author

Listed:
  • Andreas Gintschel
  • Bernd Scherer

    (Morgan Stanley, Investment Management)

Abstract

This paper develops a framework for partially hedging the market risk of oil reserves through appropriately allocating financial assets for Sovereign Wealth Funds, in particular so-called ‘oil revenue’ or ‘petroleum’ funds. Empirically, the hedge potential is substantial even when using relatively coarse partitions of the investment universe, such as Morgan Stanley Capital International (MSCI) country or industry indices. For example, if the market values of oil reserves and financial funds are equal, risk reduction is by as much as 50 per cent (10 per cent if short sales are not allowed) from original levels, translating into a certainty equivalent return of 3.26 per cent pa (48 basis points if short sales are not allowed). Moreover, choosing a portfolio along the efficient frontier, which is typically viewed as the key task in asset allocation, is relatively unimportant compared to the hedge decision.

Suggested Citation

  • Andreas Gintschel & Bernd Scherer, 2008. "Optimal asset allocation for sovereign wealth funds," Journal of Asset Management, Palgrave Macmillan, vol. 9(3), pages 215-238, September.
  • Handle: RePEc:pal:assmgt:v:9:y:2008:i:3:d:10.1057_jam.2008.19
    DOI: 10.1057/jam.2008.19
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    Citations

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    Cited by:

    1. van den Bremer, Ton & van der Ploeg, Frederick & Wills, Samuel, 2016. "The Elephant In The Ground: Managing Oil And Sovereign Wealth," European Economic Review, Elsevier, vol. 82(C), pages 113-131.
    2. Ciarlone, Alessio & Miceli, Valeria, 2016. "Escaping financial crises? Macro evidence from sovereign wealth funds' investment behaviour," Emerging Markets Review, Elsevier, vol. 27(C), pages 169-196.
    3. Li, Jie & Huang, Huaxia & Xiao, Xiao, 2012. "The sovereign property of foreign reserve investment in China: A CVaR approach," Economic Modelling, Elsevier, vol. 29(5), pages 1524-1536.
    4. William L. Megginson & Asif I. Malik & Xin Yue Zhou, 2023. "Sovereign wealth funds in the post-pandemic era," Journal of International Business Policy, Palgrave Macmillan, vol. 6(3), pages 253-275, September.
    5. Rick Van der Ploeg & Ton van den Bremer, 2016. "Saving Alberta’s Resource Revenues:," OxCarre Working Papers 179, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    6. Mario L. Torriani & Pablo Orazi & Matias Vicens, 2022. "Strategic Asset Allocation of a Reserves’ Portfolio: Hedging Against Shocks," Open Economies Review, Springer, vol. 33(5), pages 973-995, November.
    7. Narjess Boubakri & Veljko Fotak & Omrane Guedhami & Yukihiro Yasuda, 2023. "The heterogeneous and evolving roles of sovereign wealth funds: Issues, challenges, and research agenda," Journal of International Business Policy, Palgrave Macmillan, vol. 6(3), pages 241-252, September.
    8. Cai, Mingchao & Chen, Zhihong, 2019. "Does country background risk matter to the strategic asset allocation of sovereign wealth funds?," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    9. Moutanabbir, Khouzeima & Noureldin, Diaa, 2020. "Optimal asset allocation and consumption rules for commodity-based sovereign wealth funds," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 708-730.
    10. van der Ploeg, Frederick & ,, 2016. "Saving Alberta’s Resource Revenues: Role of Intergenerational and Liquidity Funds," CEPR Discussion Papers 11522, C.E.P.R. Discussion Papers.
    11. van den Bremer, Ton S. & van der Ploeg, Frederick, 2016. "Saving Alberta's resource revenues: Role of intergenerational and liquidity funds," Energy Policy, Elsevier, vol. 99(C), pages 132-146.
    12. Oliver McPherson‐Smith, 2021. "Diversification, Khashoggi, and Saudi Arabia’s Public Investment Fund," Global Policy, London School of Economics and Political Science, vol. 12(2), pages 190-203, April.
    13. Aaron Howard Clifford Brown & Mr. Michael G. Papaioannou & Iva Petrova, 2010. "Macrofinancial Linkages of the Strategic Asset Allocation of Commodity-Based Sovereign Wealth Funds," IMF Working Papers 2010/009, International Monetary Fund.
    14. Martinez-Oviedo, Raul & Medda, Francesca, 2017. "Assessing the effects of adding timberland and farmland into resource-based Sovereign Wealth Fund portfolios," Journal of Economics and Business, Elsevier, vol. 91(C), pages 24-40.
    15. Maria Teresa Medeiros Garcia, 2014. "Management of Pension Funds: the Case of Portugal," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 4(4), pages 792-792.
    16. van den Bremer, Ton & van der Ploeg, Frederick & Wills, Samuel, 2016. "The Elephant In The Ground: Managing Oil And Sovereign Wealth," European Economic Review, Elsevier, vol. 82(C), pages 113-131.

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