Sovereign wealth funds

Sovereign wealth funds are state-owned funds that are invested in different avenues across the globe. The money for such a fund is accumulated by the country or its central bank from sources like banking system, oil trading, foreign currency reserves, pension funds, precious metals etc. They are assets of the corresponding nation. They are generally invested with a long term horizon. Investment management entities are setup by the state to manage these funds.



Creation of Sovereign Wealth Funds

A sovereign fund is created when a nation has excess liquidity than is desired, which cannot be immediately consumed. This liquidity is maintained in the form of reserve currencies, precious metals, oil etc. These funds are used as a source of stability or a cushion against volatility in the international market for raw materials that are imported. By employing these funds, one can control the impact on the government expenditure due to the short term volatility of markets. During the recent credit crisis there were stories of some sovereign wealth funds making bad investments in Wall Street firms that have collapsed and needed cash infusion.

Concerns regarding Sovereign Wealth Funds:

There are certain concerns regarding these funds. Lack of transparency, no clear goal sometimes and their huge size which can have a great impact on asset markets. The total worth of most of these funds globally is now more than $3 trillion and growing at a fast pace. There are also security concerns due to these foreign investments as one of the potential motive might be to control certain strategically important industries of the country.

I came across a financial research article by S G Analytics, a KPO about these funds. The article argues that protectionist barriers are not the answer to security concerns arising from the nationality of the incoming investment. A more transparent and good regulatory environment is better suited to address these concerns.