What are Sovereign Wealth Funds?

With over $3 trillion worth of assets invested into sovereign wealth funds in 2008, these types of investment instruments have been garnering their fair share of attention from savvy investors.

Sovereign wealth funds are globally-invested funds constructed of securities such as stocks and bonds as well as property, precious metals or other investment instruments that are state-owned and are used by nations to stabilize their economy. More simply put, sovereign wealth funds are “assets held by governments in another country’s currency” (International Money Fund). Nations use sovereign wealth funds as a way to invest their excess money to turn a profit, as opposed to immediately reinvesting into the economy or storing it in their national banks.

Types of Sovereign Wealth Funds

As with every type of investment, there are a couple of different varieties of sovereign wealth funds. They are:

  • Commodity Sovereign Wealth Funds – Financed by the exporting of basic goods used for commerce including commodities such as oil, gold or pension funds
  • Non-commodity Sovereign Wealth Funds – Financed by the excess of foreign currency reserves

Although they sound like a new and exotic idea, sovereign wealth funds have actually been around since the 1950’s, and experts predict that the global market could take the total assets invested in sovereign wealth funds to the $10 trillion range by 2012. About twenty countries have a sovereign wealth fund, and more nations are trying to set some up for investment purposes, thus further intertwining all the economies of the world.

Building Wealth

Over half of the assets in sovereign wealth funds are held by countries who are major producers and exporters of oil such as Kazakhstan, Dubai and Canada. Investors interested in diversifying their holdings with sovereign wealth funds need to take measures to ensure that they thoroughly understand the terms of their potential investment. Each fund is composed of different financial instruments and follow different investment strategies in hopes of generating a profit.

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GOBankingRates Staff

These articles are written by the in-house GOBankingRates team.

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