UPDATE 1-Korean sovereign fund to diversify assets

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By Daisy Ku

LONDON, March 13 (Reuters) - Korea Investment Corp (KIC), South Korea's sovereign wealth fund, is to put a third of its assets this year into alternative assets such as hedge funds, private equity and real estate to diversify its portfolio.

KIC, which was set up in 2005, has invested in only bonds and equities, with 60 percent of the $20 billion worth fund in fixed income. But as the size of the sovereign wealth fund grows, it is eyeing alternative assets.

"We like to diversify our portfolios to lower the overall risk," Jaeuk Khil, member of steering committee of KIC told Reuters on the sidelines of Central Banking Publications' Sovereign Wealth Management Conference in London on Thursday.

KIC, which invested $2 billion in Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research) earlier this year, is likely to outsource to third party managers the $10 billion the Ministry of Finance injected into it this year, he said.

The Korean government plans to increase the asset size of KIC to $50 billion by 2010.

Fuelled by dramatic growth in emerging-world current-account surpluses, sovereign wealth funds are expected to reach $15 trillion within five years from a current $3 trillion, according to HSBC.

With low government bond yields and a weak U.S. dollar, sovereign wealth funds' risk appetite is on the rise.