Sovereign Wealth Funds: Investment Objectives and Asset Allocation Strategies

Abstract

Sovereign Wealth Funds (SWFs) have steadily increased their importance in the global financial system in the last decade and especially during the financial crisis period. They currently have almost $6 trillion assets under management, which is more than the assets of Private Equity and Hedge Funds together. Although the objectives and investment strategies of SWFs are quite diverse, I propose to sort them into three main groups, depending on their sponsor countries' endowment with resources and investment objectives. The first group of SWFs depends on funds generated from the extraction of natural resources and intends to support the economy's transformation to a viable structure for future industry. The second group invests strategically to ensure the availability of resources or technology. The main investment objective of these funds may be partly perceived as political in nature. The third group includes funds whose primary objective is to optimize asset allocation decisions in order to generate high wealth and income for future generations. I present case studies and empirical analyses that reflect SWF investment activities and try to elaborate on the special role of each SWF group. Special emphasis is given to the recent financial crisis, where SWFs also acted as bailout investors by injecting substantial capital into global financial institutions, filling a financing gap that other institutional investors could not close.