Column : Questions about sovereign wealth funds

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: Globally, countries hold over $6 trillion of assets in forex reserves. These are managed either by their central banks or their sovereign wealth funds (SWFs). For example, India alone has around $250 billion in forex reserves, currently managed by RBI. However, SWFs are not one of the larger players in global financial markets. SWF asset holdings ($3.1 trillion) amount to much less than those of mutual funds, pension funds and insurance companies ($20-30 trillion) but more than the $1.9 trillion assets of hedge funds and $1 trillion of private equity groups.

The growing size of these reserves prompt many questions on optimal management. Many of these focus on the advantages/disadvantages of forming an SWF and the merits/demerits of having a central bank versus an SWF- managed reserves. Joshua Aizenman and Reuven Glick of the IMF answer some of these questions in a working paper. They explore three specific questions—what are the institutional and political factors that lead to the formation of SWFs, what are the main differences in the management of forex reserves by a central bank versus an SWF and which form of management is more advantageous.  

Using a sample of 29 SWFs across the world, they identify the main factors that drove the formation of SWFs to be the rise in commodity prices and current account surpluses in emerging economies. They make a distinction between commodity funds (SWFs that are funded by commodity exports, either owned or taxed by government, such as Norway’s Government Pension Fund) and non-commodity funds (SWFs that own assets directly transferred from forex reserves, such as the China Investment Corporation or Singapore’s GIC).