Those Fickle Sovereign Wealth Funds

Libya s Shadow on Sovereign Wealth Funds

Indeed, as the financial crisis spread to the emerging markets that host most SWFs, the proportion of foreign investments within SWF portfolios fell to about 60 .

Views about how to respond to the SWF s vary. The United Kingdom has adopted a laissez faire approach, while political concerns dominate in the US, France and Germany.

Sovereign wealth funds, too, are increasingly involved in financing development.

To achieve this, SWFs must alter their investment pattern.

Other examples of domestic stabilization by SWFs abound.

While news of SWF divestments has historically been extremely rare, we identified 23 SWF divestments during 2009, worth more than 14 billion.

NEW YORK Two years ago, sovereign wealth funds (SWFs) were the bogeymen of world finance.

Some experts even estimate SWFs assets to be worth 6 trillion.

Now that the crisis is abating, concerns about the SWFs and their behavior are returning.

Incidentally, it is plausible that the cyclical behavior of the SWFs is responsible for the underperformance of their holdings.

Given that SWFs primary objective is to transfer wealth to future generations, their high level of exposure to fossil fuel markets is unsustainable.

This is true even if the economic expansion is led by state owned companies and by Russian sovereign wealth funds.

Yet, this trend cannot last forever, as many of the economies hosting SWFs simply do not offer sufficient attractive investment opportunities to absorb the bulk of SWF investments.

This initiative should be supported unequivocally, serving as a springboard for a stronger focus on green investment among SWFs.

But they are unlikely to want to do so at this point, even if the US political system allowed it.

Their surpluses have turned into deficits, and their sovereign wealth funds and currency reserves have suffered major losses.

SWFs like to portray themselves as politically independent, commercially motivated investment vehicles.

Secretary Paulson has emphasized that the US is open for business from sovereign wealth funds.

But the emergence of SWF s is creating a political backlash in the form of financial protectionism.

Given these advantages, SWFs play a large and growing role in infrastructure finance.

During the second half of 2008, however, a clear retreat of SWFs towards domestic markets became visible.

As a result, no domestic retreat by SWFs can be expected to persist.

However, even if we can agree on keeping the US open to sovereign wealth fund investments, that is no reason for promoting exchange rate policies that exacerbate the very trade imbalances that are driving the whole sovereign wealth fund phenomenon in the first place.

China s sovereign wealth fund and non bank financial institutions have been eager to invest in well established Western banks.

And gold buyers include not just individuals, but also sophisticated institutions and sovereign wealth funds.

All SWFs can respond to global political events by quickly withdrawing funds invested abroad.

But the minute the sub prime crisis subsides, anxieties about SWF s will return.

Given the geographical distribution of SWFs and their investments, truly global regulation is highly unlikely.

The need to increase the transparency of SWF operations should not be allowed to eclipse their potential benefits.

With the right approach, SWFs can offer significant long term benefits to all.

New investment vehicles, such as sovereign wealth funds and Islamic finance, can contribute financing to credit starved firms.

SWF s are, it seems, here to stay and grow, and they do offer significant benefits.

In general, however, opacity is a defining feature of most SWFs, exacerbating the risks that they pose.

Furthermore, SWFs have comparative advantages over other kinds of institutional investors.

But the message is clear when domestic economies require stabilization, SWFs will shift their focus to domestic investments.

First, we have seen multiple examples of domestic investments by SWFs clearly aimed at sustaining and stabilizing domestic economies.

As a result, many countries have established sovereign wealth funds to invest their surpluses in international markets.

This initiative should be supported unequivocally, serving as a springboard for a stronger focus on green investment among SWFs.

Indeed, the first signs of new growth in SWF foreign investments could already be seen towards the end of 2009.

Third, the LIA saga highlights SWFs potential cumulative effect on the stability of global markets.

Of course, not all SWF s favor strategic investments, i.e. taking controlling stakes in the acquired firms.

As a result, banks and insurers might disengage from infrastructure finance, creating more opportunity at lower cost for SWFs.

This means that only 20 of these reserves, based on which SWF assets are valued, can be burned unabated.