Sovereign wealth fund
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A Sovereign wealth fund (SWF) is a fund owned by a state composed of financial assets such as stocks, bonds, property or other financial instruments.
Sovereign wealth funds are, broadly defined, entities that can manage the national savings for the purposes of investment. The accumulated funds may have their origin in, or may represent foreign currency deposits, gold, SDRs and IMF reserve position held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings. These are assets of the sovereign nations which are typically (but not necessarily) held in domestic and different reserve currencies such as the dollar, euro and yen. The names attributed to the management entities may include central banks, official investment companies, state pension funds, sovereign oil funds and so on.
There have been attempts to distinguish funds held by sovereign entities from foreign exchange reserves held by central banks. The former can be characterized as maximizing long term return, with the latter serving short term currency stabilization and liquidity management. This distinction points in the right direction, but is still unsatisfactory. Many central banks in recent years possess reserves massively in excess of needs for liquidity or foreign exchange management. Moreover it is widely believed most have diversified hugely into assets other than short term, highly liquid monetary ones (almost no data is available however to back up this assertion). Some central banks even have begun buying equities, or derivatives of differing ilk (even if fairly safe ones, like Overnight Interest rate swaps).
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[edit] History
Most of the savings of SWFs originate in accumulated foreign currency reserves. These were formerly held only in gold, as official gold reserves. But under the Bretton Woods system, the United States pegged the dollar to gold, and allowed convertibility of dollars to gold. This effectively made dollars appear as good as gold. The U.S. later abandoned the gold standard, but the dollar has remained relatively stable as a fiat currency, and it is still the most significant reserve currency. In the 1990s and early 2000s, central banks began to hold ever more vast amounts of assets in multiple currencies. Given the sizes (beginning to surpass the total outstanding of domestic bond and stock markets), these amounts have been increasingly often invested in non-traditional banking assets by entities with a specific mission, set by the public authorities.
Sovereign wealth funds as a term has been around at least since 2005. It has become increasingly popular as the spending power of global officialdom rockets upwards.
[edit] Nature and Purpose
SWFs are typically created when governments have budgetary surpluses and have little or no international debt. This excess liquidity is not always possible or desirable to hold as money or to channel it into consumption immediately. This is especially the case when a nation depends on raw material exports like oil, copper or diamonds. To reduce the volatility of government revenues, counter the boom-bust cycles' adverse effect on government spending and the national economy or build up savings for future generations, SWFs may be created. One example of such a fund is The Government Pension Fund of Norway.
Other reasons for creating SWFs may be economical, 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 is partially the expression of a desire to create an international financial center. The Korean Investment Corporation has since been similarly managed.
[edit] Early SWFs
Some of the funds today are 21st century creations, while others have been around for decades. One of the first registered SWF is the Kiribati Revenue Equalisation Reserve Fund. Created in 1956 when the British administration of the Gilbert Islands in Micronesia put a levy on the export of phosphates (bird manure) used in fertilizer, the fund has since then grown to $520m [4].
[edit] Criticisms
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There are several reasons why the growth of sovereign wealth funds is attracting close attention.
- First, as this asset pool continues to grow in size and importance, so does its potential impact on various asset markets.
- Second, and relatedly, some critics worry that foreign investment by sovereign wealth funds 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[1]. These concerns have led the EU to reconsider whether to allow its members to use "golden shares" to block certain foreign acquisitions.[5] In the U.S., these concerns are addressed by the Exon-Florio Amendment to the Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, § 5021, 102 Stat. 1107, 1426 (codified as amended at 50 U.S.C. app. § 2170 (2000)), as administered by the Committee on Foreign Investment in the United States (CFIUS).
- Third, sovereign wealth funds are not nearly as homogeneous as central banks or public pension funds. However they do have a number of interesting and unique characteristics in common. These make them a distinct and potentially valuable tool for achieving certain public policy and macroeconomic goals.
[edit] Levels
At the end of 2006, estimates on the investments held by SWFs vary between one and seven trillion US dollars, depending on how widely the net is cast (foreign exchange reserves account for around $4.5 trillion of the total). According to The Economist, SWFs market capitalization is about $2.5 trillion. However this number is highly uncertain because of the difficulty of counting SWF holdings. For comparison the total market capitalization of hedge funds might be only $1.6 trillion, although this figure is also highly uncertain (these are not assets, so in principle it excludes leverage).
ADIA (Abu Dhabi Investment Authority) is named as one of the "Super Seven" funds, all of which have assets over $100 billion. These funds are: The Government Pension Fund of Norway($322 billion); Government of Singapore Investment Corporation ($330 billion); Kuwait Investment Authority ($213 billion); China Investment Corporation ($200 billion); The Stabilisation Fund of the Russian Federation ($127.5 billion); and Singapore's Temasek Holdings ($108 billion). As a proportion of GDP the five largest funds are ADIA, Brunei ($30 billion); Kuwait, the Qatar Investment Authority QIA ($60 billion) and Singapore's GIC. Smaller funds, such as those held by Azerbaijan, Trinidad & Tobago, Ecuador and Nigeria account for $0.1 trillion of the world's $2.2 trillion total of SWF's.
Countries with the largest sovereign wealth funds
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[edit] See also
- Sovereign investment fund
- Foreign exchange reserves
- List of countries by foreign exchange reserves
- Balance of payments
- Official gold reserves
- Reserve currency
- Special Drawing Rights
[edit] References
[edit] External links
[edit] Source
- ExcessLiquidity.org: A blog about Sovereign Wealth Funds - News, Commentary, Analysis
- Who holds the wealth of nations?
- The world's most expensive club
- Sovereign wealth funds brim with money
- www.kic.go.kr
[edit] Articles
- How big could sovereign wealth funds be by 2015
- Sovereign wealth funds and the 2500bn question, Financial Times, 25 May 2007
- Gulf states Sovereign wealth fund reserves swell, Financial Times, 31 May 2007
- The $2.5 trillion wave of cash heading our way, Telegraph, 16 July 2007
- Singapore's GIC: a tough act to follow, Reuters 01 August 2007
- Sovereign Wealth Funds: The Need for Greater Transparency and Accountability, Peterson Institute for International Economics, 20 October 2007
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