Revision for “Sovereign Wealth Funds” created on May 10, 2013 @ 03:08:33
Sovereign Wealth Funds
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A <b>sovereign wealth fund</b> (<b>SWF</b>) is a state-owned <a title="Investment fund" href="http://en.wikipedia.org/wiki/Investment_fund">investment fund</a> composed of <a title="Finance" href="http://en.wikipedia.org/wiki/Finance">financial</a> <a title="Asset" href="http://en.wikipedia.org/wiki/Asset">assets</a> such as <a title="Stock" href="http://en.wikipedia.org/wiki/Stock">stocks</a>, <a title="Bond (finance)" href="http://en.wikipedia.org/wiki/Bond_(finance)">bonds</a>, <a title="Property" href="http://en.wikipedia.org/wiki/Property">property</a>, <a title="Precious metal" href="http://en.wikipedia.org/wiki/Precious_metal">precious metals</a>, or other <a title="Financial instruments" href="http://en.wikipedia.org/wiki/Financial_instruments">financial instruments</a>. Sovereign wealth funds invest globally. Most SWFs are funded by foreign exchange assets.
Some sovereign wealth funds may be held by a <a title="Central bank" href="http://en.wikipedia.org/wiki/Central_bank">central bank</a>, which accumulates the funds in the course of its management of a nation’s banking system; this type of fund is usually of major economic and fiscal importance. Other sovereign wealth funds are simply the state savings that are invested by various entities for the purposes of investment return, and that may not have a significant role in fiscal management.
The accumulated funds may have their origin in, or may represent, foreign <a title="Currency" href="http://en.wikipedia.org/wiki/Currency">currency</a> deposits, <a title="Gold" href="http://en.wikipedia.org/wiki/Gold">gold</a>, <a title="Special drawing rights" href="http://en.wikipedia.org/wiki/Special_drawing_rights">special drawing rights</a> (SDRs) and <a title="International Monetary Fund" href="http://en.wikipedia.org/wiki/International_Monetary_Fund">International Monetary Fund</a> (IMF) reserve positions 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<a title="Asset" href="http://en.wikipedia.org/wiki/Asset">assets</a> of the sovereign nations that are typically held in domestic and different <a title="Reserve currency" href="http://en.wikipedia.org/wiki/Reserve_currency">reserve currencies</a> (such as the <a title="United States dollar" href="http://en.wikipedia.org/wiki/United_States_dollar">dollar</a>, <a title="Euro" href="http://en.wikipedia.org/wiki/Euro">euro</a>, <a title="Pound (currency)" href="http://en.wikipedia.org/wiki/Pound_(currency)">pound</a>, and <a title="Yen" href="http://en.wikipedia.org/wiki/Yen">yen</a>). Such <a title="Investment management" href="http://en.wikipedia.org/wiki/Investment_management">investment management</a> entities may be set up as official investment companies, state pension funds, or sovereign oil funds, among others.
There have been attempts to distinguish funds held by sovereign entities from <a title="Foreign-exchange reserves" href="http://en.wikipedia.org/wiki/Foreign-exchange_reserves">foreign-exchange reserves</a> held by central banks. Sovereign wealth funds can be characterized as<i>maximizing long-term return</i>, with foreign exchange reserves serving short-term "currency stabilization", and liquidity management. 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, though almost no data is publicly available to back up this assertion. Some central banks have even begun buying equities, or derivatives of differing ilk (even if fairly safe ones, like overnight <a title="Interest rate swap" href="http://en.wikipedia.org/wiki/Interest_rate_swap">interest rate swaps</a>).<sup>[<i><a title="Wikipedia:Citation needed" href="http://en.wikipedia.org/wiki/Wikipedia:Citation_needed">citation needed</a></i>]</sup>
Some of them have grabbed attention making bad investments in several Wall Street financial firms such as <a title="Citigroup" href="http://en.wikipedia.org/wiki/Citigroup">Citigroup</a>, <a title="Morgan Stanley" href="http://en.wikipedia.org/wiki/Morgan_Stanley">Morgan Stanley</a>, and <a title="Merrill Lynch" href="http://en.wikipedia.org/wiki/Merrill_Lynch">Merrill Lynch</a>. These firms needed a cash infusion due to losses resulting from mismanagement and the <a title="Subprime mortgage crisis" href="http://en.wikipedia.org/wiki/Subprime_mortgage_crisis">subprime mortgage crisis</a>.
Another of the first registered SWFs is the <a title="Revenue Equalization Reserve Fund" href="http://en.wikipedia.org/wiki/Revenue_Equalization_Reserve_Fund">Revenue Equalization Reserve Fund</a> of <a title="Kiribati" href="http://en.wikipedia.org/wiki/Kiribati">Kiribati</a>. Created in 1956, when the British administration of the <a title="Gilbert Islands" href="http://en.wikipedia.org/wiki/Gilbert_Islands">Gilbert Islands</a> in <a title="Micronesia" href="http://en.wikipedia.org/wiki/Micronesia">Micronesia</a> put a levy on the export of <a title="Phosphates" href="http://en.wikipedia.org/wiki/Phosphates">phosphates</a> used in<a title="Fertilizer" href="http://en.wikipedia.org/wiki/Fertilizer">fertilizer</a>, the fund has since then grown to $520 million.<sup id="cite_ref-2"><a href="http://en.wikipedia.org/wiki/Sovereign_wealth_fund#cite_note-2"></a></sup>
There are two types of funds: saving funds and stabilization funds. Stabilization SWFs are created to reduce the volatility of government revenues, to counter the boom-bust cycles’ adverse effect on government spending and the national economy. Savings SWFs build up savings for future generations. One such fund is the Government Pension Fund of Norway. It is believed that SWFs in resource-rich countries can help avoid resource curse, but the literature on this question is controversial. Governments may be able to spend the money immediately, but risk causing the economy to overheat, e.g., in <a title="Hugo Chávez" href="http://en.wikipedia.org/wiki/Hugo_Ch%C3%A1vez">Hugo Chávez</a>’s Venezuela or Shah-era Iran. In such circumstances, saving the money to spend during a period of low inflation is often desirable.
Other reasons for creating SWFs may be economical, or strategic, such as <a title="War chest" href="http://en.wikipedia.org/wiki/War_chest">war chests</a> for uncertain times. For example, the Kuwait Investment Authority during the <a title="Gulf War" href="http://en.wikipedia.org/wiki/Gulf_War">Gulf War</a> managed excess reserves above the level needed for currency reserves (although many central banks do that now). The <a title="Government of Singapore Investment Corporation" href="http://en.wikipedia.org/wiki/Government_of_Singapore_Investment_Corporation">Government of Singapore Investment Corporation</a> and Temasek Holdings are partially the expression of a desire to bolster Singapore’s standing as an international financial centre. The Korea Investment Corporation has since been similarly managed.
Countries with SWFs funded by commodities’ exports, primarily oil and gas exports, totalled $2.7 trillion at the end of 2011. Non-commodity SWFs totalled $2.1 trillion. Non-commodity SWFs are typically funded by transfer of assets from official foreign exchange reserves, and in some cases from government budget surpluses and privatisation revenue. Asian countries account for the bulk of such funds.
An important point to note is the SWF-to-Foreign Reserve Exchange Ratio, which shows the proportion a government has invested in investments relative to currency reserves. According to the SWF Institute, most oil-producing nations in <a title="Persian Gulf" href="http://en.wikipedia.org/wiki/Persian_Gulf">The Gulf</a> have a higher SWF-to-Foreign Exchange Ratio — for example, the Qatar Investment Authority (5.89 times) compared to the China Investment Corporation (0.12 times) — reflecting a more aggressive stance to seek higher returns.<sup>[<i><a title="Wikipedia:Citation needed" href="http://en.wikipedia.org/wiki/Wikipedia:Citation_needed">citation needed</a></i>]</sup>