Sovereign wealth funds are increasingly investing in China, private credit, and digital assets amid market volatility.

    by VT Markets
    /
    Jul 14, 2025
    Sovereign wealth funds are changing their approach from passive to active management because of market uncertainty. Notably, 60% of these funds plan to invest more in China, with a surprising 73% of North American funds following suit, even amidst geopolitical tensions. The US dollar remains strong. A significant 78% of central banks believe that finding a viable alternative will take at least 20 years. Only 11% see the euro strengthening, a drop from 20% in the past. Central banks are diversifying their reserves in response to market volatility and worries about rising US debt. Over 70% believe the debt situation is negatively affecting the dollar’s future. Private credit is becoming increasingly attractive, with 73% of wealth funds investing in it and half planning to invest more. Interest in digital assets is also on the rise, with stablecoins gaining popularity, but bitcoin remains the favorite at 75%, compared to about 50% for stablecoins. The shift from passive to active strategies among sovereign wealth funds shows their response to ongoing market instability and a desire for more control. By investing more in Chinese assets, these state-backed funds are signaling long-term confidence in China’s growth, even with rising global tensions. This trend, particularly evident among North American funds, indicates a focus on opportunities while others are more cautious. It’s a strategic bet—not just on performance but on staying ahead of restrictive policies. Regarding the US dollar, its dominance remains clear to monetary authorities. There’s a general agreement that no other currency will realistically challenge it for decades. However, the declining confidence in the euro highlights its weaknesses, as shown by a drop in optimism. This decline reflects political instability and uneven integration in key areas. At the same time, central banks are increasingly focusing on diversifying their reserves. Many now recognize that rising US debt could negatively impact the dollar’s stability over the long term. This doesn’t mean they will pull out immediately; instead, they will proceed with caution and seek broader options. Reserve managers are focusing more on varying durations and credit profiles than before. Private credit’s rising popularity is noteworthy. With lower returns from traditional bonds and limited growth potential in equities, wealth funds are allocating more to less liquid, higher-yield investments. With over 70% already invested and half looking to invest further, this shift indicates a growing trend. Investors are willing to take on more complexity for better yields. Digital assets continue to attract interest, with bitcoin still favored over stablecoins. This suggests a focus on growth potential rather than just transactional stability. However, the increasing interest in stablecoins shows that discussions are expanding, opening up new opportunities in this part of the market. The data we see is significant. For those of us heavily involved in short-dated derivatives, we must be prepared for less predictable flows, especially from these long-capital sources. The move to active allocation indicates more hedging, relative value positioning, and directional views through listed and OTC instruments. We can expect volatility in interest rates and foreign exchange to become more complex. Liquidity providers should adjust their short-term models accordingly. When central banks alter their reserve strategies and state money begins to invest in less liquid assets, derivative flows will change as well. Keep duration biases subtle, lean towards short gamma when appropriate, and don’t underestimate how sovereign decisions can affect local yield curves. Every change in flow creates ripple effects, and this shift suggests a drop in conviction but an increase in dispersion.

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