Over the course of the past decade or so, a new group of funds has been gaining more importance in the financial markets and the economy throughout the world; Sovereign Funds. What are these funds? They have a lot of misconceptions about them, often because lately the ones that we have heard most about are funds that come from Arabic countries. But actually, a lot of countries manage such funds, many of them are Western countries.
One of the first known funds was established such fund was set up by the government of Norway, the Petroleum fund (its funds are mostly accumulated on taxes for the oil industry in Norway) is managed by a division of the Norway central bank. They established a fund in 1990 to be able to establish a better retirement for its citizens. Believe it or not, this fund now manages almost 400$USD Billions! For some reason, this fund has not been at the centre of a controversy. But other funds, especially those from the middle east, have been bringing up a lot of debates among regulators in the past few years.
An important difference with sovereign funds is that they often have different goals than simply a risk/return objective. That is even more true in some funds such as ones in Abu Dhabi (the largest in the world with about 875$USD Billions). These funds often also have strategic objectives to either gain an exposure or a position for its government/country that might profit in other ways than economical. If you remember well, a few years ago, there was a big debate in the United States over the idea of letting a sovereign fund from Dubai buy some ports in the US and the investment never happened after all because the US viewed these ports as critical to its national security.
One of the main problems with these funds is that they are subject to even less regulations than Hedge Funds which translates into governments, regulators and the media/populations not knowing what they are up to. This year, they have been seen as a force for the good by many as they injected massive sums of money into the troubled banking system. But they might be the ones regretting those moves as they have been getting dismal returns on such investments. Morgan Stanley estimates that the nearly $2.3 trillion dollars under management by these funds have returned -25% in 2008…! Of course, these are major approximations as most of the investments by these funds are done privately, often off markets and these funds usually do not publish any results.
It will be interesting to see how these funds can evolve in the next few years and if pressure from regulators will help generate more transparency for outsiders into what these funds are up to.