The Coming of Age of Sovereign Wealth Funds

Government-owned investment vehicles or Sovereign Wealth Funds (SWFs) are emerging as relevant players in global financial markets. Their rapid increase in size and asset range has captured considerable attention as capital flows now shift from emerging to developed economies. The goal of this article is to provide insights for a better understanding of these investment vehicles and to extract some policy lessons from emblematic cases. We start by presenting some stylised facts about the fast-paced reserve accumulation over the last decade in emerging economies and how that has contributed to the emergence and coming of age of SWFs. We then explore the rationale for SWFs, considering the different purposes they are meant to accomplish in originating countries—foreign asset diversification, stabilisation and/or saving vehicles. Next, we examine the concerns that SWFs have raised in developed countries, which centre on their management and potential effects on global financial stability. Finally, we delve into some of the desirable characteristics for the management of these funds that have recently been discussed in the literature. We believe that it is important for SWFs to follow sound corporate governance policies that generate an equal amount of confidence in countries of origin as well as in recipient countries, dispelling fears that may lead to undue financial protectionism. This will guarantee that these funds attain the goals they were created for and allow recipient nations to benefit from this new source of funding.