The Financial Crisis Hits Sovereign Wealth Funds

Has SAMA surpassed ADIA as the world’s largest SWF? This paper from the Council of Foreign Relations suggests that SAMA’s more conservative investments have allowed it to grow to as much as $500 billion in assets, while ADIA’s riskier portfolio, once estimated to be near $800 billion, may have been halved.

 No idea what I’m talking about? Here is my quick primer on Sovereign Wealth Funds:

Sovereign wealth funds (SWFs) are government-owned investment funds.  Nobody can agree on an exact definition for them.  Usually governments get money for SWFs either from the direct sale of resources, like oil, or from excess foreign reserves accumulated by central banks as they intervene in currency markets.  SWFs usually go after longer-term, higher-risk, and higher-return assets (as opposed to classic official reserves, which are invested in highly liquid and safe assets.)  SWFs can have many goals, including maximizing returns on wealth, saving wealth for future generations, smoothing income, or investing in strategic sectors.  Sovereign wealth funds vary highly in terms of their management structure and how transparent they are.

Some people worry that SWF investment could pose a threat, either because the funds invest with malicious intent, or simply because they represent large concentrations of money.  The fact is, concerns should not be unique to SWFs.  Individuals can act in financial markets with bad intent, or do harmful things out of stupidity.  And while SWFs are big relative to hedge funds and private equity, they aren’t that large compared to pension or mutual funds.   And there are good things about SWFs too.  If foreign governments have a stake in the U.S. economy, they may be more likely to pursue policies that are beneficial to the U.S.  Also, SWFs typically have low leverage, so they can take more losses without those losses spreading through the financial system.  Lastly, they often pursue longer-term, private-equity type investments, which are more stable than portfolio investments. 

 

For those who know all about SWFs, try my fun SWF Matching Game! Match the personal to the SWF who submitted it! 

a.       Temasek of Singapore

b.      Russia National Wealth Fund

c.       China Investment Corporation

d.      Abu Dhabi Investment Authority

e.      Saudi Arabian Monetary Authority funds

f.        Norway Government Pension Fund

 

1.       Wealthy hot-shot SWF seeks super-sexy investment.  I’m willing to take on some risk; even though I may have lost half my value this year, I’m still WAAAY richer than those American hedge funds.

2.       Responsible SWF seeks a balanced portfolio of investments.  Investments must be carbon-neutral, low-pollution, fair trade, unionized, family-friendly, organic, pro-free speech, and not tested on animals.

3.       SWF suffering identity crisis seeks investment in state-owned banks as part of parent country’s financial market bailout.

4.       Ambitious SWF of a parent country with an infinite supply of dollars seeks investment in strategic sector or resources.  No need for the investment to perform financially.

5.       SWF seeks investments around the world, but especially likes Asian markets.  Please don’t confuse me with my sibling GIC; I am much more transparent!

6.       Increasingly wealthy SWF seeks conservative investment.  I can’t give any more details on what I am looking for, as that would reveal too much.

 

Answers: 1:d, 2:f, 3:b, 4:c, 5:a, 6:e