Sovereign Wealth Fund

Sovereign Wealth Fund (SWF)

Funds owned by sovereign nations that invest the savings of an entire state, foreign exchange reserves, or excess liquidity.

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Sovereign Wealth Fund

A government-owned company that invests that government's excess reserves. That is, if a country has a current account surplus or a positive balance of trade the government may deposit the excess funds into a sovereign wealth fund. The funds are invested in securities, companies, or projects in order to increase the government's net worth. Often a sovereign wealth fund pays for a government's social programs such as welfare or a state pension. The funds in a sovereign wealth fund are kept separate from the country's regular currency reserves. Sovereign wealth funds are common in oil-rich countries where the government owns a significant portion of the oil production facilities.

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Sovereign wealth fund (SWF). A sovereign wealth fund (SWF) is a government-owned enterprise that invests a portion of its country's foreign-exchange reserves in global financial markets.

These reserves consist of a balance of payments surplus, also called a current account surplus, that are created because the payments received in overseas currencies for the country's exports, such as natural resources or manufactured goods, exceed what its residents are paying for imports.

Unlike the traditional overseas investments that governments make to ensure liquidity, such as the purchase of US Treasury securities, SWF assets are separate from official reserves and are typically invested in the private sector to produce higher returns.

SWFs are controversial, in part because their investment strategies, portfolio holdings, and returns are generally secret and in part because of the concern that the sponsoring countries could exert substantial economic pressure on the companies and countries where they invest.