Everything There Is To Know About Sovereign Wealth Funds

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Sovereign wealth funds are an underlooked aspect of the economy, and play a key part in shaping the economic wellbeing of nations. The country you live in most likely has a sovereign wealth fund, so it’s important to understand what they are and why they are so important to the economy of the country.

To understand what a sovereign wealth fund is, it is easy to draw parallels to other forms of funds that are similar. For example, hedge funds act in a very similar way to many sovereign wealth funds, with the exception being that hedge funds are run privately while sovereign wealth funds are run by the state.

Both hedge funds and sovereign wealth funds will invest in a similar style. You can read about this in a recent Medium article that goes over the various investors in a healthcare company consisting of many various types of investment groups, including the sovereign wealth fund of Singapore.

We’ll go over why sovereign wealth funds are used and their history. We’ll also list off some of the largest sovereign wealth funds.

Why Are Sovereign Wealth Funds Used?

There are many different reasons why a country would want to create a sovereign wealth fund, but there are a few main reasons that are often the case when a country chooses to create a fund.

One reason is the need for diversification. There are many countries that have just one industry that makes the majority of their money, and if that industry went through economic hardship, they would suffer greater than other economies. By investing some of their profits into a sovereign wealth fund it helps mitigate the risk of that occurring. 

For countries that have a diversified economy already, they may choose to use a sovereign wealth fund as a means to generate money through the various forms of investments already available in the country. A great example of this is the Alaska Permanent Fund, which is made up of oil and mining revenues, and pays out $1,600 to each citizen of Alaska. Read more information about this fund on the Wikipedia page about it. 

History of Sovereign Wealth Funds

The first state wealth fund was established by the state of Texas in 1854 to fund public education. The Permanent School Fund still exists to this day, and is estimated to be worth $48.3 billion. The assets the fund holds are publicly owned lands in Texas along with some other various investments.

Though technically speaking, that wasn’t really a sovereign wealth fund as Texas is not a sovereign state. It wouldn’t be until 1953 that the first sovereign wealth fund would be established for the newly independent nation of Kuwait. Today, the fund is worth $853 billion.

The term “sovereign wealth fund” was coined by Andrew Rozanov in 2005 when he wrote an article “Who holds the wealth of nations?” after the number of sovereign wealth funds began to rise in the beginning of the 21st century.

What Are The Largest Sovereign Wealth Funds?

The largest sovereign wealth fund in the world is Norway’s Government Pension Fund Global. At an estimated $1.478 trillion in value, it is the largest sovereign wealth fund in the world. Also known as the Oil Fund, it was established in 1990 as a means to invest the profits from Norway’s petroleum sector back into the country. Since then, it has grown and invested in other companies. It was reported to have held 1.4% of the world’s listed companies in 2019 as well.

The second largest sovereign wealth fund is France’s Caisse des dépôts et consignations. Worth an estimated $1.416 trillion, it is not far behind Norway’s sovereign wealth fund. The fund was established in 1816, but wasn’t considered a sovereign wealth fund until later on as the first sovereign wealth fund was reportedly established in 1953.

The third and fourth largest sovereign wealth funds are both owned by China, and are the China Investment Corporation with an estimated $1.350 trillion in holdings and the SAFE Investment Company with $1.019 trillion in holdings.

The United Arab Emirates has the fifth largest sovereign wealth fund, worth an estimated $853 billion. 

The fund owned by Kuwait mentioned previously in the article which was founded in 1953 is now the sixth largest in the world, being Kuwait’s Kuwait Investment Authority.

Hopefully you found something to take away from this article, as it’s important to understand why sovereign wealth funds are used and what the current largest ones are.

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