What Is a Sovereign Wealth Fund (SWF)?
A sovereign wealth fund is a state-owned investment fund comprised of money generated by the government, often derived from a country's surplus reserves. SWFs provide a benefit for a country's economy and its 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.