Regulating sovereign wealth funds in search of the golden mean

Abstract

Sovereign Wealth Funds are generally defined as state-owned investment vehicles, which manage a diversified portfolio of domestic and international financial assets. They have emerged as a way for governments, rather than individuals and privately owned firms, to invest the foreign exchange reserves that have been generated by expanded trade. Investments by SWFs are one type of capital flow between countries, so they have always been closely related to global imbalances in trade. When countries run surpluses on their current account, they generate equal and opposite net capital outflows of one sort or another and those capital flows produce an investment income. SWFs have been funded in various ways: from central bank reserves, the export of state-owned resources, taxation of exports, fiscal surpluses or from privatization receipts. Whatever their origins, objectives or funding, the SWF model is not new, even if their number has increased sharply over recent years. It is estimated that 35% of all SWFs were established over the past five years.