What are the disadvantages of sovereign wealth funds?
Despite the advantages, SWFs are not without their drawbacks. One concern is the potential for mismanagement and corruption. Poor governance and lack of transparency can lead to funds being misappropriated or invested in risky ventures, resulting in significant financial losses.
The funding for a SWF can come from a variety of sources. Popular sources are surplus reserves from state-owned natural resource revenues, trade surpluses, bank reserves that may accumulate from budgeting excesses, foreign currency operations, money from privatizations, and governmental transfer payments.
Section 892 generally exempts foreign governments (and their sovereign wealth funds and other affiliates) from United States federal income tax on certain types of income, including certain income from stocks, bonds, and other securities.
Sovereign wealth funds favor value-added, opportunistic real estate strategies. Sovereign wealth funds had 34% of their real estate assets invested in the value-added category followed by 31% in opportunistic.
Norway's sovereign wealth fund, the world's largest, was established in the 1990s to invest the surplus revenues of the country's oil and gas sector. To date, the fund has put money in more than 8,500 companies in 70 countries around the world.
All SWFs exhibit redemption risks lower than the market average, but that redemption risk is not zero. Because of their dual mission to generate financial as well as social returns, their redemption risk is most probably higher than that of other long-term investors, such as endowment funds.
Many nations use sovereign wealth funds as a way to accrue profit for the benefit of the nation's economy and its citizens. The primary functions of a sovereign wealth fund are to stabilize the country's economy through diversification and to generate wealth for future generations.
SWFs grew rapidly between 2008 and 2021, with global assets under management by these funds increasing from approximately $4 trillion to more than $10 trillion. SWFs invest in a variety of asset classes such as stocks, bonds, real estate, private equity and hedge funds.
26 U.S. Code § 892 - Income of foreign governments and of international organizations. interest on deposits in banks in the United States of moneys belonging to such foreign governments, shall not be included in gross income and shall be exempt from taxation under this subtitle.
Section 892 generally exempts foreign government investors from US federal income tax on income from investments in stocks, bonds, and other securities. However, any such income that is derived from a “commercial activity” or that is derived by or from a “controlled commercial entity” is not eligible for the exemption.
How do you build a sovereign wealth fund?
SWFs are usually established using balance of payments surpluses, official foreign currency reservoirs, proceeds of privatizations, government transfer payments, fiscal surpluses, and/or receipts from commodity exports.
The primary purpose of a stabilization SWF is to provide a source of funds that can be used to cushion the impact of commodity-price volatility on the exporting nation's economy and budget.

The strong rally last year in global stocks helped to swell the assets managed by the sovereign wealth funds worldwide to a record $11.2 trillion. Total sovereign-controlled spending on the energy transition - everything from green hydrogen to lithium mining - also hit a record $25.9 billion in 2023, the report said.
Leading global sovereign wealth funds 2022, by assets under management. The world's largest sovereign wealth fund (SWF) as of December 2022 was China Investment Corporation (CIC), managing assets reaching around 1.35 trillion U.S. dollars.
2023 rank | Fund Manager | Headquarters |
---|---|---|
1 | Blackstone | New York |
2 | KKR | New York |
3 | EQT | Stockholm |
4 | Thoma Bravo | Chicago |
Bridgewater Associates
Westport, Conn. Westport, Conn. In 1975, Bridgewater Associates was founded by Ray Dalio in his Manhattan apartment. Today Bridgewater is the largest hedge fund in the world and Dalio has a personal fortune of approximately $19 billion.
A sovereign wealth fund can increase the overall rate of investment in society and reinvest the returns on those investments, thereby contributing to national economic growth. Increasing national wealth makes it more likely that society can support needy citizens in the future.
Types of Sovereign Debt
Bonds issued by developed economies, such as Germany, Switzerland, or Canada, usually carry very high credit ratings. 12 They are considered extremely safe and offer relatively low yields.
The biggest downside of investing in T-bills is that you're going to get a lower rate of return compared to other investments, such as certificates of deposit, money market funds, corporate bonds or stocks. If you're looking to make some serious gains in your portfolio, T-bills aren't going to cut it.
Some countries may have more than one SWF. Also, while the United States does not have a federal sovereign wealth fund, several of its states have their own SWFs. The list does not include pension funds that do not meet the SWF criteria.
Why is Norway's sovereign wealth fund so big?
Created in the 1990s to manage Norway's oil and gas revenues abroad, the fund is the world's biggest single owner of equities. Its returns are highly dependent on market movements.
As defined by the US Department of the Treasury, sovereign wealth funds (SWFs) are government investment funds (or pools of money) funded by foreign currency reserves but managed separately from official currency reserves which governments use to invest, typically in foreign companies.
Rank | State | Fund |
---|---|---|
1 | Alaska | Alaska Permanent Fund |
2 | Texas | Permanent School Fund |
3 | Permanent University Fund |
Sovereign wealth funds (SWFs) have over $11.5 trillion in assets under management as of February 2023. Most of these 176 funds are sponsored by non-Western countries and their growth has made SWFs important international investors, particularly in private equity funding.
The Santiago Principles consists of 24 generally accepted principles and practices voluntarily endorsed by IFSWF members. The Santiago Principles promote transparency, good governance, accountability and prudent investment practices whilst encouraging a more open dialogue and deeper understanding of SWF activities.