FRBSF ECONOMIC LETTER
Number 2007-38, December 14, 2007
Sovereign wealth funds (SWFs) are saving funds
controlled by sovereign governments that hold
and manage foreign assets. Private analysts put
current sovereign wealth fund assets in the range
of $1.5 to 2.5 trillion.This amount is projected
to grow sevenfold to $15 trillion in the next ten
years, an amount larger than the current global
stock of foreign reserves of about $5 trillion (Jen
2007).While not a new phenomenon, the recent
activities and projected growth of SWFs have
stirred debate about the extent to which their
size may allow them to destabilize financial markets
and their policies may be driven by political, rather
than economic and financial, considerations.
This Letter gives an overview of the debate about
the expanding role of SWFs in international finan-
cial markets.We explain the forces leading to their
growth and the challenges they pose for financial
globalization.While there is no quick fix to these
challenges, encouraging SWFs to invest in well-
diversified equity indexes in individual countries,
such as the S&P 500 in the United States,may trans-
form the role of these funds from stumbling blocks
to stepping stones towards financial globalization.
Reasons for the growth of SWFs
The growth of SWFs may be viewed as an unin-
tended consequence of countries running persis-
tent current account surpluses and accumulating
net foreign assets. SWFs arise as a by-product of
these current account surpluses in circumstances
where sovereign governments retain control of
the foreign assets.
There are several reasons for the accumulation of
net foreign assets by sovereigns and the resulting
growth of sovereign wealth funds. First, the recent
commodity price boom has swelled the sovereign
asset holdings of commodity-exporting countries
where the public sector controls commodity ex-
ports or heavily taxes the revenues earned by
private commodity exporters. Earlier commodity
price booms vividly illustrate the adverse effect
on competitiveness of domesti