Sovereign Wealth Funds (SWFs) have become increasingly huge players in the global financial landscape.
These state-owned investment funds manage vast pools of assets, strategically deployed to generate returns and withstand economic shocks.
What is a Sovereign Wealth Fund?
A sovereign wealth fund (SWF) is a state-owned investment fund comprised of money generated by the government, often derived from a country’s surplus reserves.
SWFs invest in a wide range of assets, including stocks, bonds, real estate, precious metals, and alternative investments such as private equity (PE), venture capital (VC), or hedge funds.
Sovereign Wealth Funds (SWFs) invest money worldwide to grow wealth over the long term.
Historical Background
The origins of SWFs can be traced back to the mid-19th century when the U.S. state of Texas established funds to finance public services.
However, the first SWF established for a sovereign state is the Kuwait Investment Authority, a commodity SWF created in 1953 from oil revenues before Kuwait gained independence from the United Kingdom. Following Kuwait’s lead, Kiribati established a fund in 1956 to manage revenue reserves.
The term “sovereign wealth fund” was first used in 2005 by Andrew Rozanov in an article entitled, “Who holds the wealth of nations?” in the Central Banking Journal. It wasn’t until the late 1990s that the number of SWFs began to proliferate.
This surge was driven by rising commodity prices and global payment imbalances.
The growth of SWFs accelerated after 2002 due to factors such as soaring petroleum prices, growing Asian current account surpluses, and rising commodity prices.
Types of Sovereign Wealth Funds
SWFs can be categorized based on their primary objectives and sources of funding. Some common types include:
- Stabilization funds: These funds aim to insulate the economy from commodity price volatility or other external shocks. They often accumulate reserves during periods of high commodity prices and draw upon them during downturns.
- Savings or future generation funds: These funds invest surplus revenues to generate wealth for future generations, particularly in countries with finite natural resources.
- Pension reserve funds: These funds are designed to support and supplement public pension systems, ensuring long-term financial stability for retirement programs.
- Reserve investment funds: These funds focus on maximizing investment returns from excess foreign currency reserves.
- Strategic Development Sovereign Wealth Funds (SDSWF): These funds actively invest in sectors or projects deemed strategically important for national development, such as infrastructure, technology, or specific industries.
- Funds targeting specific industries: These funds may focus on investing in emerging or distressed industries to promote growth or economic restructuring.
Why are SWFs Important?
SWFs play a crucial role in the global economy for several reasons:
- Economic Stabilization: SWFs can help stabilize a country’s economy by diversifying its investments and providing a buffer against economic shocks. For countries heavily reliant on commodity exports, SWFs can mitigate the impact of volatile resource prices. Following the mortgage crisis of 2006-2008, sovereign wealth funds helped rescue struggling Western banks like CitiGroup, Merrill Lynch, UBS, and Morgan Stanley.
- Intergenerational Savings: Some SWFs, like Norway’s Government Pension Fund, serve as savings vehicles for future generations. These funds invest revenues from finite resources to ensure long-term economic prosperity.
- Investment Returns: SWFs aim to generate investment returns that can be used to fund government programs, reduce debt, or support social welfare initiatives.
- Strategic Investments: SWFs can make strategic investments in key industries, both domestically and internationally, to promote economic development and advance national interests. However, it’s important to note that some countries have concerns about SWF investments potentially being used for political purposes or to gain control of strategically important industries.
Governance and Regulations
The governments of SWFs commit to follow certain rules:
- Accumulation rule: This rule defines what portion of government revenue can be saved or invested in the SWF.
- Withdrawal rule: This rule specifies when and how the government can withdraw funds from the SWF.
- Investment rule: This rule outlines the permissible investment activities and asset classes for the SWF, including any restrictions on foreign or domestic investments.
Transparency and Accountability
The Linaburg-Maduell Transparency Index, developed by the Sovereign Wealth Fund Institute, is a 10-point scale that assesses the transparency of SWFs based on ten principles.
This index is used by sovereign wealth funds in their annual reports and serves as a benchmark for good governance practices.
Examples of Sovereign Wealth Funds
Today, SWFs manage trillions of dollars in assets, making them significant players in global financial markets. As of January 2025, the top five largest SWFs by assets were:
| Rank | Fund Name | Assets (USD Trillion) |
|---|---|---|
| 1 | Norway Government Pension Fund Global | Over 1.7 |
| 2 | China Investment Corporation | Over 1.3 |
| 3 | SAFE Investment Company | Over 1 |
| 4 | Abu Dhabi Investment Authority | Over 1 |
| 5 | Kuwait Investment Authority | Over 1 |
SWFs invested a record $257.5bn across 743 deals in 2022.
They continue to evolve, adapting their investment strategies to navigate a changing global landscape. They are increasingly focused on diversification, investing in a broader range of asset classes and geographies.
One of the key aims of many recently formed strategic SWFs is to help catalyze international investment.
By co-investing with the private sector, strategic SWFs can help to de-risk projects and thereby attract investment from firms that might otherwise be wary of committing.
For example, Temasek, a Singaporean SWF, has a particular focus on the deep tech sector, while Bahrain’s Mumtalakat states its commitment to investing in strategic industries within the Kingdom of Bahrain.
With their increasing level of assets invested in public and private equity holdings, SWFs are in a position to exercise greater influence on corporate governance practices and responsible ownership.
As long-term investors, SWFs can ride out short-term business cycles in a way that can be extremely beneficial, particularly during periods of turmoil in global financial markets.
A U.S. Sovereign Wealth Fund?
In February 2025, President Donald Trump signed an executive order to establish a sovereign wealth fund for the United States.
This move has generated considerable discussion and debate. The proposed SWF aims to “monetize the asset side of the U.S. balance sheet for the American people.”
The executive order directs the Secretary of the Treasury and the Secretary of Commerce to deliver a plan within 90 days for the creation of the sovereign wealth fund.
This plan should include recommendations for funding mechanisms, investment strategies, fund structure, and a governance model.
The creation of a sovereign wealth fund for the United States will help maximize the stewardship of our national wealth and promote fiscal sustainability.
The Trump administration has suggested that the fund could be used to acquire TikTok, the popular social media platform owned by China’s ByteDance. Other potential investments include infrastructure projects and stakes in vaccine manufacturers.
However, there are concerns about the feasibility and governance of a SWF. Critics argue that the U.S., with its deep and sophisticated financial markets, does not need a state-owned investment fund. They also raise questions about potential political influence and the lack of clear funding mechanisms.