What is Sovereign Wealth Fund?

About Sovereign Wealth Funds

A Sovereign Wealth Fund (SWF) is a state-owned investment fund or entity that is commonly established from balanced of payments surpluses, official foreign currency operations, the proceeds of privatizations, governmental transfer payments, fiscal surpluses, and/or receipts resulting from resource exports. The definition of sovereign wealth fund excludes, among other things, foreign currency reserve assets held by monetary authorities for the traditional balance of payments or monetary policy purposes, state-owned enterprises (SOEs) in the traditional sense, government employee pension funds (funded by employee/employer contributions), or asset managed for the benefit of individuals.

Interesting Facts About Sovereign Wealth Funds
– Some funds may invest indirectly in domestic industries.
– In addition, they tend to prefer returns over liquidity, thus they have a higher risk tolerance than traditional foreign exchange reserves.

Sovereign Wealth Funds may have their origin in:
– Commodities – Created through commodity exports, either taxed or owned by the government
– Non-Commodities – Usually created through transfers of assets from official foreign exchange reserves.

Classifications of Sovereign Wealth Funds
1. Stabilization Funds
2. Savings / Future Generated Funds
3. Pension Reserve Funds
4. Reserve Investment Funds
5. Strategic Development SWFs

Nature & Purpose
Each sovereign fund has its own unique reason for its creation; furthermore, all funds have their own objectives.

Common Sovereign Wealth Fund Objectives:
1. Protect & stabilize the budget and economy from excess volatibility in revenues/exports
2. Diversify from non-renewable commodity exports
3. Earn greater returns than on foreign exchange reserves
4. Assists monetary authorities dissipate unwanted liquidity
5. Increase savings for future generations
6. Fund social and economical development
7. Sustainable long term capital growth for target countries
8. Political strategy

Types of Sovereign Invesment Vehicles:
1. Sovereign Wealth Funds (SWFs) – example Qatar Investment Authority
2. Public Pension Funds – example CalPERS
3. State-owned enterprises (SWEs) – example Chinalco
4. Sovereign Wealth Enterprises – example St. Martins’s Property

The legal basis in which sovereign wealth funds are created varies from governmental authority and fund.
1. Constitutive Law
2. Fiscal Law
3. Constitution
4. Company Law
5. Other Laws and Regulations

Sovereign funds generally indicate that they do not engage directly in macro economic policies, but with three key exceptions:
1. Transfers to the budget for exceptional and targeted needs
2. The drawdown of funds for transfer to the central bank in case of exceptional balance of payments or monetary policy needs. In one case, a separate short-term fund was set aside for such purposes.
3. Stabilize domestic businesses or corporations vital to the interest of the economy.