In the decade following the Global Financial Crisis, many sovereign wealth funds (SWFs) have continued to allocate to passive index strategies in both fixedincome and equity assets, typically for very lengthy investment horizons. Holdings within these passive portfolios are often perceived to be under-utilized, and SWFs are increasingly looking to new avenues to extract increased portfolio yields and to introduce greater efficiencies in their investment management activities. In particular, a sustained period of low interest rates in key fixed-income markets has accelerated the adoption of novel asset utilization techniques from which SWFs are uniquely well-placed to benefit given their long-term investment horizons and large holdings of high-quality assets. Furthermore, regulatory reform has increased the demand from market participants for such assets for use as collateral, while driving fragmentation of the sources of liquidity.
As a result, the landscape of trading venues is being transformed through growth in electronic and algorithmic trading, to which SWFs will also need to pay attention to ensure continued optimal execution and reduction of trading costs. Among the most commonly employed and widely adopted techniques for improving asset utilization and portfolio efficiency include:
1. Securities lending,
2. Enhanced cash utilization,
3. Collateral transformation,
4. Margin optimization for OTC-traded securities, and
5. Electronic and/or algorithmic trading.