What To Do With All That SWF Money?

It seems that Sovereign Wealth Funds (SWF) are accumulating cash, but are having a difficult time managing it. As mentioned in a recent Financial Times article, even some of the smallest SWFs, such as the Timor-Leste Petroleum Fund, have already grown to over $1 billion. Estimates put the total amount of funds globally at $3,000 billion. Although the larger established funds have managers with ties to the hedge fund world, some of the smaller ones do not, and are at times struggling to keep up. While the SWFs appear to be attractive due to the scale of the available capital, the fees can be quite low compared to traditional hedge funds that are used to a 2-20 structure.

The shear magnitude of the size of each fund, as well as the increasing number of funds, could be a shot in the arm for a few depressed sectors regardless of how they are managed. Traditionally the SWFs have been conservative investors, putting most of their money into fixed assets. As they start to look at longer-time horizons, they initially step into the global equity arena, and then begin to move to more illiquid assets, such as private equity and real estate. Look for this trend to continue, and look for the influence of SWF in helping to keep companies and depressed sectors a float to continue. Of note is that while the limited influence of SWF investments can help deploy capital to certain sectors of the economy, the funds are less likely to find their way into commodities, especially crude oil. Many of the SWF are funded from commodity and crude oil revenues and are looking for ways to diversify their holdings. Therefore, those areas with low correlation to commodities are the ones most likely to see the benefits from the capital these funds can provide.