Sovereign Wealth Funds have dominated headlines recently.Although investments by China's CIC and by GCC funds have been welcomed by high profile companies such as Citigroup etc.,their growing influence has made policy makers distinctly uneasy.With assets under management predicted to increase to $12 trillion by 2015 the issue of regulating their activities has become extremely important.
SWF's have become extremely influential because most of them are state backed and have access to the huge surpluses of energy exporters, or other Asian countries which have run up large trade surpluses as a result of conscious policies adopted to prevent a recurrence of the crisis of the late 1990's.Rather than being content with investing in US bonds these funds are now seeking higher returns in equity markets.This trend may accelerate if interest rates fall further.
As SWF's become more active there is bound to be increasing friction with countries in which they invest,primarily because of a lack of transparency in their activities.As dedicated investment departments and state backed companies from Russia,China and the Gulf go on an investment spree, alarm bells are starting to ring.Successful IPO's, especially by Chinese companies have further increased their investible resources.
By their very nature, being long term investors, SWF's in fact may contribute to greater stability in the world financial markets.But it is the fear of their acquiring managing control in vital sectors,which makes countries wary of their activities.SWF's on their part have sought to play down these fears by often investing in non voting stock.
Various responses have been suggested to regulate the activities of SWF's, but since each country will have a different response, it is difficult to adopt a common approach.In the end bilateral agreements between the investing country and the host country to regulate their activities may be the only solution. On the other hand the SWF's may themselves decide to be more transparent in their activities so as to prevent obstacles being placed in their path.