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.
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 ourwebsite? We'll be adding to it regularly so keep an eye out for them!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.