The 10 Trillion Dollar Sovereign Wealth Fund Game!

Imagine a fund with so much money that it held 1% of all the equity from all the stock exchanges of the world and still had money left over to buy huge quantities of other assets as well! Now, imagine that most people in the world were not even aware of the existence of such a fund or the enormous financial power it holds. Also, imagine that the money under the control of this fund was not strictly regulated.

This fund isn’t an illusion. The fund described above is the sovereign wealth fund of Norway. In fact, it isn’t even the largest sovereign wealth fund. It just happens to provide slightly more information than the others. That is the reason why we are discussing the sovereign wealth fund of Norway while not discussing bigger funds like the sovereign fund of the Abu Dhabi government.

In this article, we will have a closer look at the concept of sovereign wealth funds and the power they hold in the financial world.

Definition of Sovereign Wealth Fund

There isn’t one single definition of sovereign wealth funds. This is because the activities that these funds perform are secretive as well as different from one another. Therefore, coming up with a comprehensive definition is difficult.

However, sovereign wealth funds can be considered to be investment vehicles which receive their funding from the government. Therefore, to begin with, sovereign wealth funds save on marketing expenses that have to be incurred by other funds to raise investments. Also, the flow of funds for investments works like clockwork, and there is absolutely no uncertainty.

Also, the investments being made by these funds are actively controlled by governments. These investments, by and large, involve foreign assets. Sovereign wealth funds invest very rarely in domestic assets. The secrecy which surrounds the investments made by these funds, as well as the opacity of the information regarding their investments, can also be considered to be the defining characteristics of such funds. Governments often state that sovereign funds are created to buy strategically important foreign assets.

Just How Much Money Do Sovereign Wealth Funds Have ?

Sovereign wealth funds have more cash than many governments in the world do. The estimated total amount of cash invested in such funds is over $10 trillion. To give some idea of how large that amount really is, a comparison can be drawn with the Chinese GDP. China is the second biggest economy in the world. Yet, The monetary value of all the goods and services produced by it is less than the money sovereign funds hold in reserves.

The largest sovereign wealth fund i.e. the Abu Dhabi fund is known to have more than $800 billion in its coffers. Most of the countries which are rich in natural resources such as oil have allocated huge amounts of money to their sovereign funds. Another case in point would be the Russian sovereign fund.

Help During Subprime Crisis

The massive amounts of money possessed by the sovereign wealth funds as well as the power that they have can be understood from the facts that the American government was requesting these funds to intervene and save the economy from total collapse. Sovereign wealth funds were said to have so much money that even if they purchased every toxic asset in the system, they still wouldn’t lose more than 20% of their total value.

Needless to say that these funds are very prudent with their investments and as a result did not pick up any stake in the toxic assets despite requests from the American government to do so.

Where Do Sovereign Wealth Funds Get Their Money From ?

Sovereign wealth funds are considered to be strategic assets for the nation. Therefore, the governments that create such funds also create mechanisms to ensure that these funds are always flush with cash. Some of the ways that sovereign wealth funds obtain cash are as follows:

  • Natural resources: Countries like Dubai and Abu Dhabi are largely dependent on natural resources for economic prosperity. However, once the oil runs out, these countries are likely to witness a massive fall in their economic activity. It is for this reason that these countries allocate a certain portion of the profits they make from oil towards a fund which buys assets in foreign countries. The idea is to ensure that even after these countries run out of oil, their governments should not run out of money.

  • Trade Surplus: Some countries like China fund their sovereign funds with trade surpluses that they generate from foreign trade. Hence if the exports of a country are greater than its imports, the balance sum can be transferred to a

  • Budget Surplus: Many countries collect more money in taxes than they need to spend. As a result, these countries are left with surplus money. A lot of countries prefer to use the sovereign fund vehicle to invest these funds. The idea is to acquire assets which will prove useful when the supply of natural resources run out!

The bottom line is that sovereign funds have vast sums of money at their disposal. This, along with the fact that their operations are shrouded in secrecy makes these funds incredibly powerful entities that can change the course of markets if they so wish to.

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Managerial Economics