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The New Economics of Sovereign Wealth Funds by Fabio Scacciavillani, Massimiliano Castelli

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3

SWFs as Investors in Global Markets

SWFs are often considered as a homogenous group of investors. In reality, SWFs include a variety of institutions with different objectives, investment behaviour and risk appetite. Generally speaking, SWFs and FWFs invest excess FX reserves (i.e. above the amount needed by the central bank) into global financial and real assets.1

In the UAE, for example, the central bank is in charge of investing less than 10% of sovereign reserves, while the bulk of oil receipts are invested by the Abu Dhabi Investment Authority (ADIA), one of the largest SWFs in the world, and other vehicles such as ADIC or Mubadala. Among large commodity exporting countries, only Saudi Arabia has not set up a SWF. Saudi Arabia assigns to its central bank, SAMA, both the management of the liquidity needed for monetary policy purposes and the investment of excess reserves.2 Russia had some investment vehicles, in particular a stabilization fund, but the central bank is directly or indirectly responsible for managing most of the sovereign wealth, because due to entrenched macroeconomic instability and periodic episodes of capital outflows the central bank must hold substantial liquid ‘fire power’. We must make a distinction, however, between the source of reserves managed by the SWFs and FWFs.

In commodity-exporting countries, the reserves managed by SWFs and the investment income they yield are primarily used to offset any unexpected shortfall in fiscal revenues during periods ...

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