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Sovereign Wealth Funds

Introduction

Creating funds to manage government wealth is not a new phenomenon. But over the past five years, wealth accumulated in existing funds has fluctuated significantly and the number of new funds has spiked. The International Monetary Fund (IMF) estimated in September 2007 that sovereign wealth funds, or SWFs, control as much as $3 trillion, and that this tally could jump to $12 trillion by 2012--though the total amount held by SWFs declined significantly during the market turmoil and commodity-price bust of late 2008. Economists and political analysts say SWFs merit analysis for several reasons. Some argue that these funds will help nations dependent on natural resources to diversify their economies, but others worry about abuses of power and urge greater transparency at SWFs.

What are sovereign wealth funds?

Sovereign wealth funds, as defined by the U.S. treasury (PDF), are government investment funds, funded by foreign currency reserves but managed separately from official currency reserves. Basically, they are pools of money governments invest for profit. Often this money is used to invest in foreign companies. For instance, China's SWF purchased stakes in the U.S. financial firms Morgan Stanley and the Blackstone Group in late 2007. Dubai's SWF has bought up shares of several Asian companies, including Sony.

Are SWFs the only way countries hold money?

No. Robert M. Kimmitt, then deputy U.S. treasury secretary, distinguished among four different kinds of sovereign wealth in a 2008 Foreign Affairs article: SWFs, international reserves, public pension funds, and state-owned enterprises. International reserves are the funds countries hold for use by their treasuries or finance ministries and central banks. Public pension funds hold the funds that states promise their citizens (Kimmitt noted that these funds have traditionally kept low exposure to foreign assets). State-owned enterprises are companies fully...

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