When we think about major financial transactions that make international headlines, such as Middle Eastern conglomerates purchasing Premier League teams or the Norwegian government investing in Tesla, it is easy to overlook the forces that often operate behind the scenes—Sovereign Wealth Funds (SWFs). These funds can be likened to sophisticated financial management accounts, overseeing vast sums of money totaling hundreds of billions, or even trillions, of dollarsThey play a crucial role in shaping the global investment landscape.

According to data from the Sovereign Wealth Fund Institute, by the end of 2024, there are over 100 actively managed sovereign wealth funds worldwide, collectively managing assets exceeding $13 trillion, a sum that would rival the Gross Domestic Product (GDP) of powerhouse economies such as Germany, Japan, and India combinedOne notable example is the Government Pension Fund of Norway, which recently reported an 18% return on its equity investments for 2024. This figure represents a New High when calculated in Norwegian Kroner, further buoyed by factors affecting the currency's valuation against major currencies from the previous year.

So, what exactly are sovereign wealth funds? How are they established, where do they source their capital from, how do they manage these vast resources, and where do they choose to invest?

The genesis of sovereign wealth funds can be traced back to the revenues generated from a country's natural resources, particularly exports like oil, gas, and mineralsHistorically, the first modern sovereign wealth fund is often cited as the Kuwait Investment Authority, established in 1953. Kuwait allocated 10% of its annual oil revenue to this fund, aiming to safeguard its economy against the volatility of global oil prices and to ensure a reserve for future generations.

Totaling a sizeable foreign exchange surplus accumulated from the oil crises of the 1970s and 1980s, many nations mirrored Kuwait’s initiative and established their own sovereign wealth funds

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For instance, Saudi Arabia launched its Public Investment Fund in 1971, the UAE established the Abu Dhabi Investment Authority in 1976, and Oman set up its State General Reserve Fund in 1980. Through these initiatives, countries began to understand and leverage the benefits of strategically managing their wealth domestically and abroad.

The second significant source of funding for these sovereign wealth funds is foreign exchange reservesA prominent example of this is the Singapore Government Investment Corporation (GIC), which was established in 1981 and primarily draws from Singapore's substantial foreign reserves to make long-term investments overseas with higher returns.

Since the 1990s, the trend of establishing sovereign wealth funds gained traction among emerging economies, as many adopted export-driven policies, amassing considerable foreign reservesTo hedge against the risks associated with potential depreciation of the US dollar, nations such as Malaysia and China also established notable sovereign wealth funds within this period—Malaysia’s Khazanah Nasional commenced operations in 1993, while China’s China Investment Corporation was officially founded in 2007.

It's essential to note that while sovereign wealth funds typically originate in wealthier nations, they are not exclusively a rich country phenomenonFor example, the Pacific island nation of Kiribati, which faces significant economic challenges and is recognized by the United Nations as one of the least developed countries, possesses a unique resource in the form of bird guano on Banaba IslandThis guano, accumulated over millennia, formed high-grade phosphate deposits, which enabled Kiribati to set up a Revenue Equalization Reserve Fund in 1956—one of the earliest sovereign wealth funds in the worldInterestingly, despite the depletion of these mineral resources, this fund had grown to nearly $900 million by 2023, far exceeding Kiribati's GDP of $28 million in the same year.

The United States presents an anomaly in this landscape

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While there is no federal sovereign wealth fund, several state governments have established their fundsIn February 2025, President Trump signed an executive order to establish a federal sovereign wealth fund, directed by the Treasury Secretary, which is set to launch within the next twelve months, although details regarding its funding sources remain elusive.

A crucial aspect of these funds lies in their managementSovereign wealth funds generally fall into two broad categories based on their governance:

1. Those managed directly by central banksIn this structure, central banks segregate excess foreign exchange reserves that surpass the liquidity and payment needs of their economy and allocate them into investment portfolios aligned with policy objectivesFor example, Norway's central bank has established the Norges Bank Investment Management, which oversees the global pension fund’s international asset investments while managing a substantial portion of the central bank’s foreign reserves.

2. Those operated by specialized investment entitiesCountries adopting this model typically set up dedicated government investment institutions or outsource management to third-party investment firmsA notable case is the UAE’s Abu Dhabi Investment Authority, which utilizes a corporate structure to emphasize the critical decision-making roles of its board and investment committees—distinguishing its operations from traditional government frameworks.

In terms of organization, sovereign wealth funds can be viewed as having three primary tiers: the government supervisory body, the sovereign wealth fund management company, and the investment portfolio operational divisions or subsidiaries.

The highest tier generally involves top government officials, with some even serving dual roles as fund leaders, such as Saudi Arabia’s Crown Prince Salman overseeing its Public Investment FundOthers, like the board chairman of the Abu Dhabi Investment Authority, are closely linked to royal leadership

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In some nations, key ministries like the central bank or treasury manage sovereign wealth fund oversight but typically refrain from intervening in daily operational matters.

The second tier consists of a well-established corporate governance structureBoards usually formulate overall investment strategies and evaluate investment performance while ensuring operational management is handled by appointed executives accountable to themSeveral sovereign wealth funds opt to bring in external professionals from the private sector, as seen with the Abu Dhabi Investment Authority’s hiring of numerous Wall Street investment experts.

Finally, the third tier may involve distinct subsidiaries dedicated to specific investment domains, enhancing operational efficiency across various asset classes.

As for investment strategies, sovereign wealth funds are not bound by the same principles as foreign exchange reserve management, which emphasizes liquidity and safetyInstead, these funds aim for substantial long-term returns and tend to focus on the investment potential rather than short-term fluctuations.

A comprehensive asset allocation framework is in place for managing these funds, which reflects their evolving investment priorities shaped by the global economy and emerging sectorsFor instance, Norway's Government Pension Fund initially invested exclusively in government bonds; it diversified into stocks in 1998, and by 2011 began investing in non-listed real estate companies.

The Abu Dhabi Investment Authority adopted a more complex asset allocation strategy, engaging in over twenty asset classes with a clear emphasis on diversification, where equities generally account for 40% to 62% of total assets, while various other classes also hold significant proportions.

More recently, the spotlight has turned toward burgeoning sectors such as artificial intelligence, renewable energy, electric vehicles, and biotechnologyProjections suggest that in 2024, sovereign wealth funds will direct $27.7 billion into AI and digital infrastructure

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