Sovereign wealth fund

History

The term "sovereign wealth fund" was first used in 2005 by Andrew Rozanov in an article entitled, "Who holds the wealth of nations?" in the Central Banking Journal. The previous edition of the journal described the shift from traditional reserve management to sovereign wealth management.

China's sovereign wealth funds entered global markets in 2007. Since then, their scale and scope have expanded significantly.

SWFs were the first institutions to use sovereign capital in an effort to contain the financial damage in the early stages of the 2008 financial crisis. SWFs are able to react quickly in such circumstances because unlike regulators, SWFs actively participate in the market.

SWFs grew rapidly between 2008 and 2021, with global assets under management by these funds increasing from approximately $4 trillion to more than $10 trillion.

SWFs invest in a variety of asset classes such as stocks, bonds, real estate, private equity and hedge funds. Many sovereign funds are directly investing in institutional real estate. According to the Sovereign Wealth Fund Institute's transaction database, around US$9.26 billion in direct sovereign wealth fund transactions were recorded in institutional real estate for the last half of 2012. In the first half of 2014, global sovereign wealth fund direct deals amounted to $50.02 billion according to the SWFI.

Early sovereign wealth funds

Sovereign wealth funds have existed for more than a century, but the number has increased dramatically since 2000. The first SWFs were non-federal U.S. state funds established in the mid-19th century to fund specific public services. The state of Texas was the first to establish such a scheme, to fund public education. The Permanent School Fund (PSF) was created in 1854 to benefit primary and secondary schools, with the Permanent University Fund (PUF) following in 1876 to benefit universities. The PUF was endowed with public lands, the ownership of which the state retained by terms of the 1845 annexation treaty between the Republic of Texas and the United States. While the PSF was first funded by an appropriation from the state legislature, it also received public lands at the same time that the PUF was created.

The SWFs of the Gulf Cooperation Council states are among the oldest and largest SWFs. The first SWF established for a sovereign state is the Kuwait Investment Authority, a commodity SWF created in 1953 from oil revenues before Kuwait gained independence from the United Kingdom. As of July 2023, Kuwait's Sovereign Wealth Fund, or locally known as Ajyal Fund, is worth $853 billion.

Another early registered SWF is the Revenue Equalization Reserve Fund of Kiribati. Since its creation in 1956, when the British administration of the Gilbert Islands in Micronesia put a levy on the export of phosphates used in fertilizer, the fund has grown to $520 million.

Nature and purpose

SWFs are typically created when governments have budgetary surpluses and have little or no international debt. It is not always possible or desirable to hold this excess liquidity as money or to channel it into immediate consumption. This is especially the case when a nation depends on raw material exports like oil, copper or diamonds. In such countries, the main reason for creating a SWF is because of the properties of resource revenue: high volatility of resource prices, unpredictability of extraction, and exhaustibility of resources.

SWFs are primarily commodity-based and many have been established by oil-rich states. SWFs of China are a notable exception to this more typical model.

Other reasons for creating SWFs may be economic, or strategic, such as war chests for uncertain times. For example, the Kuwait Investment Authority during the Gulf War managed excess reserves above the level needed for currency reserves (although many central banks do that now). The Government of Singapore Investment Corporation, Temasek Holdings, or Mubadala are partially the expression of a desire to bolster their countries' standing as an international financial centre. The Korea Investment Corporation has since been similarly managed. Sovereign wealth funds invest in all types of companies and assets, including startups like Xiaomi and renewable energy companies like Bloom Energy.{{cite web |access-date=4 August 2017 |archive-date=12 February 2017 |archive-url=https://web.archive.org/web/20170212111402/http://blogs.wsj.com/privateequity/2015/01/06/sovereign-wealth-funds-went-full-steam-ahead-direct-investing-in-2014/ |url-status=live

According to a 2014 study, SWFs are not created for reasons related to reserve accumulation and commodity-export specialization. Rather, the diffusion of SWF can best be understood as a fad whereby certain governments consider it fashionable to create SWFs and are influenced by what their peers are doing.

As market participants, SWFs influence other institutional investors, who may see investments made alongside SWFs as inherently safer. This effect can be seen with increasing frequency, especially with regard to investments made by the Government Pension Fund of Norway, Abu Dhabi Investment Authority, Temasek Holdings, and China Investment Corporation. SLFs help facilitate a state's ability to use its selective equity investments to promote its industrial policies and strategic interests.

In the context of artificial intelligence (AI) development, SWFs have been proposed as tools for managing potential social and economic disruption from automation, including supporting national AI leadership through strategic infrastructure investment, acquiring equity stakes in AI companies, and distributing AI-derived returns through universal basic dividends or stabilization funds.

Concerns

The growth of sovereign wealth funds is attracting close attention because:

• As this asset pool continues to expand in size and importance, so does its potential impact on various asset markets.
• Some countries, like the United States, which passed the Foreign Investment and National Security Act of 2007, worry that foreign investment by SWFs raises national security concerns because the purpose of the investment might be to secure control of strategically important industries for political rather than financial gain.
• Former U.S. Secretary of the Treasury Lawrence Summers has argued that the U.S. could potentially lose control of assets to wealthier foreign funds whose emergence "shake[s] [the] capitalist logic". These concerns have led the European Union (EU) to reconsider whether to allow its members to use "golden shares" to block certain foreign acquisitions.{{cite web |access-date=3 August 2007 |archive-date=23 May 2012 |archive-url=https://web.archive.org/web/20120523183832/http://dealbook.nytimes.com/2007/08/01/sovereign-wealth-funds-the-new-hedge-fund/ |url-status=live
• Their inadequate transparency is a concern for investors and regulators: for example, size and source of funds, investment goals, internal checks and balances, disclosure of relationships, and holdings in private equity funds.
• SWFs are not nearly as homogeneous as central banks or public pension funds.
• A lack of transparency and hence an increase in risk to the financial system, perhaps becoming the "new hedge funds".

The governments of SWFs commit to follow certain rules:

• Accumulation rule (what portion of revenue can be spent/saved)
• Withdraw rule (when the Government can withdraw from the fund)
• Investment (where revenue can be invested in foreign or domestic assets)

Recent governmental interest

• On 5 March 2008, a joint sub-committee of the U.S. House Financial Services Committee held a hearing to discuss the role of "Foreign Government Investment in the U.S. Economy and Financial Sector". The hearing was attended by representatives of the U.S. Department of Treasury, the U.S. Securities and Exchange Commission, the Federal Reserve Board, Norway's Ministry of Finance, Singapore's Temasek Holdings, and the Canada Pension Plan Investment Board.
• On 20 August 2008, Germany approved a law that requires parliamentary approval for foreign investments that endanger national interests. Specifically, it affects acquisitions of more than 25% of a German company's voting shares by non-European investors—but the economics minister Michael Glos has pledged that investment reviews would be "extremely rare". The legislation is loosely modeled on a similar one by the U.S. Committee on Foreign Investments. Sovereign wealth funds are also increasing their spending. In 2015, Qatar announced a $35 billion investment in United States assets over a period of five years.
• On 3 February 2025, President Donald Trump signed an executive order directing the creation of a United States sovereign wealth fund within the next year.
• On 23 February 2025, Indonesian President Prabowo Subianto announced a new sovereign wealth fund Daya Anagata Nusantara, also known as Danantara, which is expected to manage $900 billion in assets. The $20 billion first wave of investments were announced as targeting natural resource processing, artificial intelligence, and energy and food security.
• Sovereign wealth funds from Oman, Qatar, Saudi Arabia, Singapore, and the United Arab Emirates have acquired stakes in frontier AI companies including OpenAI, Anthropic, and xAI.

Santiago Principles

A number of transparency indices sprang up before the Santiago Principles, some more stringent than others. To address these concerns, some of the world's main SWFs came together in a summit in Santiago, Chile, on 2–3 September 2008. Under the leadership of the IMF, they formed a temporary International Working Group of Sovereign Wealth Funds. This working group then drafted the 24 Santiago Principles, to set out a common global set of international standards regarding transparency, independence, and accountability in the way that SWFs operate. These were published after being presented to the IMF International Monetary Financial Committee on 11 October 2008. They also considered a standing committee to represent them, and so a new organisation, the International Forum of Sovereign Wealth Funds was set up to maintain the new standards going forward and represent them in international policy debates.

As of 2016, 30 funds have formally signed up to the Principles, representing collectively 80% of the assets managed by sovereign funds globally or US$5.5 trillion.

Natural resource-rich developing economies are typically encouraged to adopt good governance standards for sovereign wealth funds, such as the Santiago Principles, which emphasize transparency, accountability, and sound investment practices. This approach is often preferred over local content policies, which can foster corruption and rent-seeking behavior in contexts with weak governance.

Size

Assets under management of SWFs amounted to $13–15 trillion as of 2025.

As of 2020, SWFs funded by oil and gas exports held a combined total of $5.4 trillion. Non-commodity SWFs are generally financed through transfers from foreign exchange reserves, government budget surpluses, or privatization proceeds. Countries in the Middle East and Asia account for 77% of all SWFs.

Depletion

Numerous SWFs have gone bankrupt throughout history. The most notable ones have been Algeria's FRR, Brazil's FSB, Ecuador's numerous SWF arrangements, Papua New Guinea's MRSF, and Venezuela's FIEM and FONDEN. The main reason why these funds have been exhausted is due to political instability, while economic determinants generally play a less important role.

SWFs in unstable countries may provoke risks for recipient states of SWF investments, given that the instability in SWF-sponsor countries makes those investments uncertain and likely to be disinvested to weather political risk in the short-term.

Highly stable countries, such as Denmark, Qatar, China, or Australia are less likely to experience SWF depletion precisely because of their political stability.

Largest sovereign wealth funds

References

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