A sovereign wealth fund is a state-owned investment fund that is used to benefit the country’s economy and citizens.

Lots of countries, and even some U.S. states, have one.

A sovereign wealth fund is essentially an investment portfolio owned by the government.

It’s simply a mechanism through which countries make investments.

Rather than let capital sit in the nation’s central bank, the SWF invests it in the global financial markets to return a profit and benefit the economy.

A pot of money that is then invested in shares, bonds, property, or other areas of potential growth.

They’re used for various purposes, such as stabilizing government revenue or saving for the future.

Funding comes from central bank reserves, currency operations, privatizations, transfer payments, and revenue from exporting natural resources.

Funds tend to prefer returns over liquidity and are therefore more risk-tolerant than traditional foreign exchange reserves.

Many of the countries that use sovereign wealth funds (SWFs) have economies that are heavily reliant on one source of income.

For example, Norway and the Middle East heavily on oil revenues.

Oil funds such as Norway’s and those of the Gulf states aim to return a profit but also to diversify the risk to their economies from the price of oil

The investments made through the SWFs are effectively a way for those countries to diversify and become less reliant on a single stream of income.

Sovereign wealth funds are some of the largest pools of capital in the global financial markets.

Norway’s sovereign wealth fund, which is technically two separate funds, is the largest and best known, with assets of roughly $1.1 trillion.

What is a Sovereign Wealth Fund (SWF)?

A Sovereign Wealth Fund (SWF) is a state-owned investment fund or entity that is commonly established from:

  • Balance of payments surpluses
  • Official foreign currency operations
  • The proceeds of privatization
  • Governmental transfer payments
  • Fiscal surpluses
  • And/or receipts resulting from resource exports

The definition of sovereign wealth fund excludes, among other things:

  • Foreign currency reserve assets held by monetary authorities for the traditional balance of payments or monetary policy purposes
  • State-owned enterprises (SOEs) in the traditional sense
  • Government-employee pension funds (funded by employee/employer contributions)
  • Or assets managed for the benefit of individuals

Sovereign Wealth Funds: Nature & Purpose

Each sovereign fund has its own unique reason for its creation; furthermore, all funds have their own objectives.

Here are some common SWF objectives:

  • Protect & stabilize the budget and economy from excess volatility in revenues/exports
  • Diversify from non-renewable commodity exports
  • Earn greater returns than on foreign exchange reserves
  • Assist monetary authorities to dissipate unwanted liquidity
  • Increase savings for future generations
  • Fund social and economical development
  • Sustainable long-term capital growth for target countries
  • Political strategy