SKorea's KIC says has gone underweight on euro assets

* KIC very worried about what's happening in Europe

* Austerity measures in Europe may not be enough

* Some debt rescheduling may be required

* Lower returns expected for fixed income

By Gertrude Chavez-Dreyfuss

NEW YORK, June 24 (Reuters) - Korea Investment Authority, South Korea's $35-billion sovereign wealth fund, has reduced exposure to euro zone equity and fixed income investments and is now underweight on assets in the region, the fund's top official said on Thursday.

"We are very worried about what's going on in Europe. I don't think the austerity measures (adopted by some of the euro zone countries) will be enough. I think they will have to do some debt rescheduling," said Scott Kalb, chief investment officer at the sovereign wealth fund known as KIC. Kalb spoke at a forum sponsored by The Korea Society.

Kalb, however, said the fund is not shorting the euro but trimming its investments in the region from what he thought was a substantial exposure.

The KIC official said Europe has "an artificial union" with Germany as the principal backer. "We're kind of shocked that Germany seems to have stepped away."

Germany came under fire at the height of the Greek debt crisis after it seemed the euro zone's largest economy was reluctant to bail out Greece. It did eventually vote to assist Greece and other indebted euro zone nations via a $1-trillion safety net, but not before widespread criticism from other euro zone countries and global investors.

More recently, Germany got flak after it announced plans for 80 billion euros in budget cuts over the next four years.

Germany's move to cut its budget deficit was criticized by billionaire investor George Soros on Wednesday. He said by cutting its budget gap and resisting a rise in wages to compensate for the decline in the purchasing power of the euro, Germany was making it more difficult for the other countries to regain competitiveness.

In other assets, KIC's Kalb believes fixed income investments should yield lower returns over the next few years and investors should instead look into equities.

"Don't expect a repeat of the bond rally of the last three years. We've had this rally for some time and it's long in the tooth," said Kalb. He estimates real returns on fixed income assets are only between 1-2 percent, while that of equities would be between 5-6 percent.

The Korean fund is also keen on boosting its position in alternative investments, mainly private equity, hedge funds, real estate, and natural resources. In private equity and hedge funds, KIC's main interest is in credit strategies and distressed assets.

At the moment, the fund has roughly an 8 percent allocation in alternative investments. Kalb said he plans to boost that to 20 percent.

Created in 2005, KIC posted returns of 18.7 percent in 2009, equivalent to about $4 billion, after losses of 13.7 percent in 2008. From inception to the first quarter of 2010, returns were at 12.0 percent.

Kalb said it expects to grow its fund by about $5-$10 billion a year. He saw KIC's assets doubling in about seven years.

(Editing by Andrew Hay)