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These include the funds' colossal size (nearing $3 trillion), their rapid growth (surpassing the $10 trillion mark within ten years), the partial reversal in the direction of investment flows, now going with greater intensity from East to West, and the mostly opaque nature of the funds backing those investments.
However, as important as SWFs have become, they are often undistinguished from other investment vehicles or contingency funds.
For example, SWFs differ from Stabilization Funds, though they share similarities.
Generally, both are accumulated by windfall profits, typically from commodity exports, but the latter's main purpose is to buffer the domestic economy from volatility created by budget shortages, inflationary pressures, and sharp or unexpected decreases in revenues. They are less exposed to risk than SWFs, because their aim is not to generate the highest returns from shorter term investments.
Similarly, Foreign Exchange Reserves (FX) and Pension Funds are distinct financial vehicles. The former generally reside with central banks, are subject to disclosure laws and oversight, are deployed in low-risk liquid assets, and are used to normalize payment imbalances or influence currency exchange rates.
The latter, like SWFs, may be extracted from excess revenues or commodity exports, but they operate more openly and are subjected to much higher restrictions and public scrutiny. For example, they must avoid risk prone or lower grade investments, because their healthy preservation for future generations is the main objective.
Differentiating Sovereign Wealth Funds
SWFs are based on current account surpluses. They differ from other state funds in that they are unregulated, are not uniformly managed, have varied and undisclosed objective, and primarily focus on well above average returns from investments made abroad.
Their global diversification allows them to sample the best opportunities, spread their risks, and by diverting their funds overseas, prevent the overheating of their local economies. They may also use part of their wealth as reserve capital for when their countries' natural resources are depleted. Importantly, for some of the wealthiest SWFs, their sovereignty is not synonymous with true public ownership.
While SWFs gain from acquiring valuable assets in distressed sectors, they also advantage recipient organizations by ensuring their solvency and growth. They have already injected considerable capital into such major financial institutions as Merrill Lynch, Citigroup, UBS, and the Carlyle Group, increasingly playing the role of the global lender of last resort.
A credible argument made in their support is that they would not act so illogically as to harm the very organizations they invest in, nor will they affect major changes in them, since they rarely possess large enough voting blocks.
Windfall oil revenues alter balance
Until now, mature core Western economies were the sources of capital, with emerging markets situated in the periphery as their targets. This established process has been altered as windfall profits from speculative investments, high oil prices, and large trade surpluses have turned countries like China, Russia, and a number of Middle Eastern oil producers into important global investors.
This outcome has led to politico-economic worries that no state on either side of the current investment flow is fully prepared for.
Staff
