Sovereign wealth fund

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A sovereign wealth fund is a state-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets. SWFs can be structured as a fund or as a reserve investment corporation. Some funds also invest indirectly in domestic state-owned enterprises. SWFs tend to prefer returns over liquidity and have a higher risk tolerance than traditional foreign exchange reserves.[1] SWFs also tend to have a long investment horizon and don’t need to be 100 percent in foreign currencies, but should be mostly in foreign currency terms.[2]

A sovereign wealth enterprise (SWE) is a sovereign investment vehicle that is owned and controlled by a sovereign wealth fund.[3]

Since 2005, at least 16 SWFs have been created and the U.S. Department of Treasury estimates they control around $2.5 trillion. Their growth skyrocketed in 2007-2008 thanks to rising commodity prices including oil and gas. But in late 2008-2009 the sovereign funds that held shares suffered large losses as the global credit crisis shifted priorities. Some countries, such as Russia, depleted their reserves to defend their currencies from capital outflows. As Western governments had to borrow to fund bail-outs and stimulus packages, so many surplus countries had to tap their reserves of extra cash. A paper by Brad Setser of the Council on Foreign Relations and Rachel Ziemba of RGE Monitor, a research firm, estimated that Gulf foreign-reserve funds and SWFs lost $350 billion in 2008, or 27% of the value of their assets. [4]

The Sovereign Wealth Fund Institute is an organization designed to study SWFs and their impact on global economics, politics, financial markets, trade, and public policy. They provide specialized services such as research and consulting to various corporations, funds, and governments.[5]

References

  1. About Sovereign Wealth Funds. SWF Institute.
  2. Inventories: A Recession Trigger?. Morgan Stanley.
  3. Sovereign Wealth Enterprise. SWF Institute.
  4. Sovereign Wealth Funds: From Torrent to Trickle. The Economist.
  5. Our Mission. SWF Institute.