LegalLingo: What is a sovereign wealth fund?

Being an aspiring commercial lawyer often means being confronted by complex, often abstract, concepts. This can result in a wall of jargon, which students and trainees often find difficult to understand. We’ve therefore introduced LegalLingo to break down these concepts into bite-size explanations to make the industry more accessible for aspiring trainees.

Second up in the series is an explanation of what a sovereign wealth fund is:

A sovereign wealth fund is a state-owned investment vehicle run and managed by a government agency. A nation typically establishes a sovereign wealth fund when there are budget or trade surpluses on its balance of payments. The surplus capital can then be pooled into a state-owned fund which the government uses to make investments for the benefit of its citizens and their economy. 

Common types of sovereign wealth funds include:

• Stabilization funds: used to insulate the economy from inflation and volatile commodity prices, a common risk with the large influxes of revenue from mineral wealth like oil.
• Future generation funds: designed to invest surplus revenue into a diverse portfolio of assets to provide for future generations.
• Public pension reserve funds: set up to put money aside to finance a nation’s pension system.

The world’s largest sovereign wealth funds:

• Norway: Norway’s sovereign wealth fund is currently the largest in the world with $1.27 trillion worth of assets under management. The Norway Government Pension Fund was established in 1990 to invest the large revenues derived from the nation’s oil wealth. 
• China: China’s sovereign wealth fund is the second largest with $941 billion worth of assets under management. The China Investment Corporation Fund was established in 2007 due to surplus foreign exchange reserves. 
• Abu Dhabi: The Abu Dhabi Investment Authority was established in 1976 to manage the budgetary surplus derived from state-owned oil and has $578 billion worth of assets under management. 

Emerging trends:

Countries with budget deficits, such as Turkey, South-Africa and Senegal, are establishing sovereign wealth funds to better manage state owned assets in a government’s portfolio.

If you found this helpful, why not check out the other LegalLingo posts on our website? We’ll be adding to it regularly so keep an eye out for them!