What horrors lie inside the Gaddafi fund | FT Alphaville

What horrors lie inside the Gaddafi fund

You’ve read the FT story — now see the document unearthed by Global Witness:

We’ll go through it later but needless to say, it confirms FT Alphaville’s worst fears about how badly the LIA mismanaged the Libyan people’s oil wealth…

Update — Let’s start with the cash, shall we?

There’s a lot been made about the amount of cash the report shows the authority putting into western bank deposits. In fact in some places this is the story on the report rather than the LIA’s gouging losses. It isn’t really, but you can’t appreciate the fund’s other asset allocations without understanding why around $20bn of its $53bn assets were in such liquid assets. It’s a huge proportion for any big investor. (Continuing the liquidity theme, it’s not a surprise to see that a great deal of the LIA’s bond portfolio was invested in short-term US Treasuries.)

It’s a puzzle we’ve considered before, but the basic explanation is that the LIA was new to the SWF game, having been incorporated in 2006. It was nevertheless a big dumping ground for the receipts from Libya’s oil sales, which were constantly flowing in and always in cash (specifically, US dollars). The LIA had to put it somewhere, and obviously made an attempt at combining diversification with a bridgehead to the west in doing so.

The thing is however, all other asset allocations lived in this oil cash shadow (although equally, the cash was also a buffer to investments going bad).

Let’s look at the LIA’s equities holdings next — a real disaster area where Col. Gaddafi’s henchmen found themselves quite in the red:

But what we find especially interesting is that so much of this equities exposure pertained to Europe and the euro:

We wonder — could the LIA have been seeking (in its own mad way) a hedge to its considerable dollar exposure? Other than that, it could simply be a function of the LIA’s strategic holdings of equities, which were dotted around European energy companies, and industrials/financials in key political allies of Libya. It is definitely not usual or the current trend in SWFs equities strategy however, so we still find it odd.

Last but not least, there’s the LIA’s lunatic foray into structured products.

It’s hardly unusual for investors to lose their shirts on these instruments. It is unusual however for a SWF to take to them so readily, we think. It’s supremely difficult to make rhyme or reason out of why so much of the LIA’s alternative investments fell into this category, versus, say, private equity as a more logical choice for a strategic investor:

Ultimately, though, it’s one of those mysteries that will die with the old LIA. All these assets are frozen now: one of the virtues of being so much in cash is that a successor Libyan sovereign wealth fund will hopefully have a fairly clean slate to convert into investments. Roll on that day soon.