Sovereigns Nearly Double the Size of Hedge Funds
February 11, 2008 Money News.com
Without much notice, sovereign wealth funds (SWFs) – those government-directed
funds stuffed with Arab oil money or export earnings, as is the case with China
– have grown in size to control almost twice the assets of hedge funds. It’s
more concentrated wealth, too.
Twenty-eight countries control now more than $2.8 trillion. Thousands of hedge
funds have, comparatively, $1.7 trillion at their disposal.
Merrill Lynch thinks that such funds may grow to $7.9 trillion over the next
three years. Morgan Stanley expects them to reach $12 trillion by 2015.
The United Arab Emirates controls $500 billion to $875 billion, making it the
largest sovereign fund.
Singapore and Norway both have more than $300 billion. Rounding out the top five
are Kuwait and Russia.
China, despite the headlines for its buys on Wall Street of late, is just the
sixth-largest sovereign fund, with only $68 billion formally dedicated to
investments so far. The country has tens of billions more it could invest but
Some oil-rich countries less friendly to the United States sit on some serious
cash, too. Venezuela has $16 billion, Iran $9 billion. One can only wonder what
these countries do with these funds, since reporting is not required and neither
country discloses their investment policies or holdings.
There is in some circles growing concern about the eventual use of sovereign
“The logic of the capitalist system depends on shareholders… It is far from
obvious that this will over time be the only motivation of governments as
shareholders,” Harvard economist and former Treasury Secretary Larry Summers
Stephen Jen, an analyst at Morgan Stanley, believes that SWFs could enable
countries to buy technology and know-how by making bids on foreign firms.
High-tech firms and foreign banks could be the primary targets of these funds,
he wrote in May of last year. Since then, more than $20 billion has flowed into
cash-strapped Wall Street firms.
SEC Chairman Christopher Cox questions the role that governments might play in
“Another issue is the conflicts of interest that arise when government is both
the regulator and the regulated,” he said. “When the government becomes both
referee and player, the game changes rather dramatically for every other
As governments grow in importance in the investment community, the rules may
very well change. How U.S. regulators used to overseeing corporate behavior will
react to the changes remains to be seen.