Sovereign Wealth Funds
The exceptionally rapid and sustained increase in global foreign exchange reserves since 2001
has been well-documented.1 The accumulation of official reserves far beyond established
benchmarks of reserve adequacy has led an increasing number of countries to establish, or
consider the establishment of, Sovereign Wealth Funds (SWFs). Appendix 4 is intended as a
brief overview of SWFs and related issues.
What is a Sovereign Wealth Fund?
There is no single, universally accepted definition of a SWF. This appendix will use the term
SWF to mean a government investment vehicle which is funded by foreign exchange assets, and
which manages those assets separately from the official reserves of the monetary authorities (the
Central Bank and reserve-related functions of the Finance Ministry).2 SWF managers typically
have a higher risk tolerance and higher expected return than traditional official reserve managers.
SWFs generally fall into two categories based on the source of the foreign exchange assets:
• Commodity funds – Commodity funds are established through commodity exports (either
owned or taxed by the government). They serve different purposes, including stabilization of
fiscal revenues, inter-generational saving, and balance of payments sterilization. Given the
recent extended sharp rise in commodity prices, many funds initially established for fiscal
stabilization or balance of payments sterilization purposes have evolved into savings funds.
Savings funds may invest in a broader range of assets than stabilization funds, which
typically focus on liquid, relatively secure assets.
• Non-commodity funds – Non-commodity funds are typically established through transfers of
assets from official foreign exchange reserves. Large current account surpluses (in some
cases complemented by capital account surpluses) have enabled non-commodity exporters
(particularly in Asia) to transfer “excess” foreign exchange reserves to stand-alone funds.