An Integrated Approach to Sovereign Wealth Risk Management

Sovereign wealth funds (SWFs) typically
have no direct earmarked liabilities. Nor
should they, as the financial asset they
represent is only part of total sovereign
assets, which in turn guarantee all
sovereign liabilities. The objective of this
paper is to incorporate the economic
balance sheet of the sovereign sponsor
into the optimal asset allocation problem
of the SWF. This paper outlines an easy to
implement solution that nests well in the
literature on SWFs. We show that economic
leverage will reduce speculative demand
but leave hedging demand (against
fluctuations in the net fiscal position
of the sovereign state) unchanged. We
also show how to extend our one-period
methodology to a multi-period context by
solving a dynamic stochastic programme.
Allowing for optimal dynamic decision
making increases the amount of equity
risk an SWF can take. The advantage is
greatest for large values of economic
leverage. Finally, we conclude that narrow
tactical asset allocation ranges limit the
SWF’s ability to manage its risks

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This BLOG  looks at pensions and their impact on what are called Public Private Partnerships or P3’s these are not really about private funding at all but about two streams of public funding, pensions and government with private capital a third partner.

We will also deal with other pension matters, such as Defined Contribution Plans (DC) vs Defined Benefit (DB) PLANS, the weakness in private plans, the need for pension reform in public pensions to have shareholder rights, directorships and ethical investment directives and policies. 

Finally taking the long view we will show how these funds are forms of evolving social capital that is dominating private capital as we evolve into socialization of capital. 

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