In financial terms, a sovereign wealth fund takes cash accumulated from domestic and trade surpluses (especially those generated from oil sales), foreign currency trading and other cash-generating ventures (such as the privatization of state-owned enterprises) and invests it in stocks, bonds, real estate, commodities and other investment venues.
In simpler terms, government wealth funds are the play money of mostly nouveau-riche nations such as Middle Eastern oil exporters and the Asian Tigers of the Pacific Rim. The funds are rarely transparent.
Sovereign wealth funds exploded in numbers and value after 2001. Three big factors contributed to the trend: The U.S. Federal Reserve reduced interest rates to near zero, thus cheapening the cost of borrowing and spurring investment and speculation at fever pitch. China's economy grew at sustained double-digits for most of the decade (China's four wealth funds controlled nearly $1 trillion in assets in late 2009). And oil prices reached record levels, netting oil exporters, especially in the Arab Gulf region, torrents of cash. (For more on the subject, read "Cash Guzzlers."
Some sovereign wealth funds are owned and run more democratically, including Alaska's Permanent Fund, established in 1976 to manage and invest proceeds from Alaska's oil sales and redistribute dividends among Alaskans. Every year, every Alaskan resident of any age is entitled to a check from the Permanent Fund. The amount fluctuates based on each year's investment yields. The 2009 dividend for each Alaskan was $1,305. In 2008, it was $2,069.
Based on rankings by the Roseville, Calif.-based Sovereign Wealth Fund Institute, the single-biggest sovereign wealth fund, by assets, is the Abu Dhabi Investment Authority of Abu Dhabi, one of the seven emirates that make up the United Arab Emirates. The fund, established in 1976 and wholly owned and controlled by the government of Abu Dhabi, had $627 billion in assets as of late 2009. The fund helped bail out Citigroup, the American banking giant, taking a 4,.9% stake in the company.
Norway's Government Pension Fund ($445 billion in assets), Saudi Arabia's SAMA Foreign Holdings ($431 billion), China's SAFE Investment Company ($347.1 billion) and the China Investment Corporation ($288 billion) are the remaining top five sovereign wealth funds. Seventeen of the top 30 sovereign wealth funds are owned by oil-exporting nations and owe their wealth to oil.
Like any investment mechanism, wealth funds can be mismanaged and overly exposed and can go bankrupt. In November 2009, Dubai's largest wealth fund, Dubai World, which held $59 billion of Dubai's $90 billion to $120 billion debt, announced that it would be unable to make payments on its debts for at least six months. The news sent markets plummeting on fears that other sovereign wealth funds would follow in Dubai World's dive.