Foreign Investment and Sovereign Wealth Funds

The amount of money now held by governments around the world both in reserves and through sovereign wealth funds (“SWFs”) represents the largest concentration of investment capital the world has ever known. Their sheer size and expected rate of growth raise important issues regarding both the origin of this wealth and how it is to be invested. The origin of these funds rests on two main factors: the global imbalances between debtor nations (like the U.S.) and surplus nations (like China), and the rise of state-owned commodity (oil) funds. As for their uses, these countries have built up sums that dwarf those held by all the hedge funds in the world combined and are set to grow at an unprecedented pace. It is incumbent upon policymakers to not wait, but rather to address this issue now, and to determine what opportunities and threats they present. We should be assessing how best to influence how these funds are utilized and invested. The issues raised involve political, economic, and security considerations.

Background

Global Central Bank reserves today total approximately $5.5 trillion. In addition to these reserves, SWFs are today estimated to have between $2.5 - 3 trillion under management.

In the past several months, the Governments of China, Japan, and Russia, among others, have announced the creation of new SWFs with significant re-allocation of present and future reserves to these funds. Independent of reserves, SWFs are conservatively expected to grow to $12 trillion by 2015 -- a figure that will roughly equal the entire U.S. GDP.

It is the scale, as well as the nature of the funds’ government ownership, that compels analysis of these enormous pools of capital and whether SWFs require new and different standards than those in place today. Existing investments by SWFs, while large by any other standard, have not fundamentally changed the character of the overall market -- but the ownership and size of these new funds requires a fresh look.

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