Sovereign Wealth Fund

There’s a new kid in town. Actually, he’s not a new kid at all, but he seems to have caught everyone’s attention now that he’s grown up. I’m talking about the “new” financial entity, the Sovereign Wealth Fund. A SWF is an investment tool used by countries to invest in other countries. Over the past five years, the number of new funds has spiked. The International Monetary Fund estimates that $3 trillion is currently being invested, and that amount could jump to 12 trillion by 2012. Though that number looks futuristic, it is only four years from now.

China’s recent investment (I hesitate to use the word “bailout”) in the struggling US companies, Morgan Stanley and Blackstone Group has raised more than a few eyebrows. And China’s SWF investments are less than a quarter of what the Abu Dhabi Investment Authority currently holds. Most sovereign funds do not disclose exactly where their money is being invested. The obvious big issue is whether these investing countries will continue to use Sovereign Wealth Funds solely as financial investments, or will they begin to use their power as political muscle. According to Lawrence Sommers, the former United States Treasury Secretary, right now the goal of these funds is “to maximize the value of their shares.” But, he cautions, “It is far from obvious that this will over time be the only motivation of governments as shareholders.”

For a financial guy, this makes me giddy. This is as exciting as human g-nome developments to biologists. I wish I could fast forward a few years to see how this all plays out. The trenches of the next world war may be on the stock market floor, and the soldiers may all be wearing suits, pardon the hyperbole. Just thinking about this is like chugging a can of Red Bull. Now I’ll never get to sleep.

By Myron Gushlak