The Four Benchmarks of Sovereign Wealth Funds
Andrew Ang*
Columbia Business School and NBER
This Version: 4 October, 2010
The benchmarks of a Sovereign Wealth Fund (SWF) should take into account the economic and political context behind the creation of the SWF and the role the SWF plays as one part of a government’s overall policy.  The first benchmark of legitimacy ensures that the capital of the
SWF is not immediately spent and instead, is gradually disbursed across the present and future generations.   The second integrated policy benchmark recognizes the implicit liabilities of the SWF by taking into account its role in government fiscal and other macro policies.  Meeting these two standards should be a prerequisite before setting the performance benchmark,which goes hand in hand with the governance structure of the SWF.  Finally, the long‐term horizon requires a SWF to consider the long‐run equilibrium benchmark of the markets in whichthe SWF invests and the long‐term externalities affecting the SWF.

1.  Introduction
At its most basic level, a Sovereign Wealth Fund (SWF) is a mechanism for moving a country’s
savings and investments from the present to the future.  SWFs have been created by many
different types of governments, democratic and autocratic, and are managed in many different
structures, ranging from central banks to independent financial corporations.  The wealth in a
SWF is owned by a government, which makes the management of SWFs different from the
management of private sector investment management companies.  While private companies
lend themselves to benchmarks emphasizing pecuniary and profit‐maximizing motives, the
ownership by a government requires that SWFs be evaluated using different benchmarks.       
In this article, I describe four benchmarks of SWFs.  While the word “benchmark” has a
connotation of purely a performance‐based measure in the financial industry, I use the word
broadly.  My intention is to give a comprehensive, top‐down view of the main issues facing
SWFs.  The benchmarks allow a SWF to compare its activities, which includes financial
performance only as one item, on an ex‐ante and ex‐post basis with itself and with its peers.  
Indeed, I show that a financial performance measure itself can only be optimally determined
after considering the wider benchmarks which I present in this paper. The benchmarks include
both qualitative and quantitative standards.  The benchmarks are not intended to be a set of
“best practice” standards, but could form the basis for the design, implementation, and
measurement of SWFs.  Some of the benchmarks, with suitable modifications, are applicable toall long‐term investors.     
My framework takes into account the political and economic pressures behind SWFs and the
environment in which they operate.  The benchmarks include the economic goals of the SWF,
financial performance and optimal asset allocation policies, management structure, and the
long‐run equilibrium of markets.  The four benchmarks are all related; the optimal choice made
in one benchmark influences the choices made in the other benchmarks.  Although it is non‐
optimal to focus only on one of these aspects without considering them as a whole, there are
certain benchmarks which are more important than others.   

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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.
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