Sovereign Wealth Funds: Stylized Facts about their Determinants and Governance*

December 2008
Joshua Aizenman Reuven Glick
Department of Economics Economic Research Department
University of California, Santa Cruz Federal Reserve Bank of San Francisco

Working Paper 2008-33
http://www.frbsf.org/publications/economics/papers/2008/wp08-33bk.pdf

Abstract:
This paper presents statistical analysis supporting stylized facts about sovereign wealth funds
(SWFs). It discusses the forces leading to the growth of SWFs, including the role of fuel
exports and ongoing current account surpluses, and large hoarding of international reserves. It
analyzes the degree to which measures of SWF governance and transparency compare with
national norms of behavior. We provide evidence that many countries with SWFs are
characterized by effective governance, but weak democratic institutions, as compared to other
nonindustrial countries. We also present a model with which we compare the optimal degree of
diversification abroad by a central bank versus that of a sovereign wealth fund. We show that
if the central bank manages its foreign assets with the objective of reducing the probability of
sudden stops, it will place a high weight on the downside risk of holding risky assets abroad
and will tend to hold primarily safe foreign assets. In contrast, if the sovereign wealth fund,
acting on behalf of the Treasury, maximizes the expected utility of a representative domestic
agent, it will opt for relatively greater holding of more risky foreign assets. We discuss how the
degree of a country’s transparency may affect the size of the foreign asset base entrusted to a
wealth fund’s management, and show that, for relatively low levels of public foreign assets,
assigning portfolio management independence to the central bank may be advantageous.
However, for a large enough foreign asset base, the opportunity cost associated with the
limited portfolio diversification of the central bank induces authorities to establish a wealth
fund in pursuit of higher returns.

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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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