Sovereign Wealth Funds Definition: Challenges and Concerns

Abstract

The main purpose of this paper is to bring a better understanding of the phenomenon of sovereign wealth funds (SWFs) by dealing with their definitional issues. Our objective is to understand why it would be difficult to have a standard and common definition of SWFs and how this definition concern could present a problem, especially for academic research. We analyzed the history of SWFs, their creation objectives, their sources of funding, the performance of their investments and their governance structure and compared them with other types of funds. We find that the lack of a common definition stems mainly from their: i) hybrid nature: SWFs are created and controlled by governments, but their investment strategies are similar to private funds; ii) high heterogeneity: SWFs have different structures, sources of funding and other creation objectives; iii) lack of transparency. Despite the establishment of Generally Accepted Principles and Practices for SWFs know as Santiago Principles, SWFs remain opaque structure and iv) similarities with other sovereign and private investors, especially in their investment strategies. These definitional problems could explain the lack of consensus on empirical studies about SWFs and the issues about the regulation of their activities. Otherwise, this study targets to contribute to the global debate on the regulation of their transactions, essentially by clarifying their subtle differences with other investment vehicles.

Harnessing Sovereign Wealth Funds in Emerging Economies toward Sustainable Development

“…SWFs typically have one of three goals: stability, savings for future generations, or domestic development. These goals often vary based on the SWF's source(s) of capital and the needs of the entity controlling it (Ouni & Plaisent, 2020). Ultimately, in a lot of cases, SWFs have been established to manage natural resource-derived revenues, yet in others, they may not be linked explicitly to the latter and have been established to manage BoP surpluses in countries with no natural resources.…”