Sovereign Wealth Funds (SWFs) are not of recent origin. The first such fund was established in Kuwait in 1950 to manage surplus revenues arising out of constant rise in oil prices. The objective was to provide for future years and for future generations when oil resources would inevitably dry up in those countries. Since then, almost all other oil-producing countries as well as countries having accumulated high-level of foreign exchange reserves due to trade surpluses have set up such funds to invest mostly in safe treasury bonds of the US and other developed countries. Despite low returns from such investments, these funds grew at a very fast rate due to abnormal rise in oil and commodity prices so much so that some of the countries like Norway piled up $322 bn of SWF. Interestingly, this is more than its Gross Domestic Product (GDP).
SWFs have been defined by Edwin M Truman, Senior fellow at the Peterson Institute for International Economics (2007a) "as a pool of domestic and international assets owned and managed by governments to achieve a variety of economic and financial objectives, including accumulation and management of reserve assets, stabilization of macroeconomic effects and transfer of wealth across generations."
These funds have been growing at a fast pace as a result of constant rise in oil and commodity prices globally and the consequent growing reserve funds of oil and other tradable commodity producers. Approximately, 70% of these funds are a result of oil and gas trading surpluses. However, most of them have preferred to invest in developed countries as these countries are considered safe haven, particularly because of the bonds floated by their governments.
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