Sovereign wealth funds: stumbling blocks or stepping stones to financial globalization?

Sovereign wealth funds (SWFs) are saving funds controlled by sovereign governments that hold and manage foreign assets. Private analysts put current sovereign wealth fund assets in the range of $1.5 to 2.5 trillion. This amount is projected to grow sevenfold to $15 trillion in the next ten years, an amount larger than the current global stock of foreign reserves of about $5 trillion (Jen 2007). While not a new phenomenon, the recent activities and projected growth of SWFs have stirred debate about the extent to which their size may allow them to destabilize financial markets and their policies may be driven by political, rather than economic and financial, considerations. ; This Economic Letter gives an overview of the debate about the expanding role of SWFs in international financial markets. We explain the forces leading to their growth and the challenges they pose for financial globalization. While there is no quick fix to these challenges, encouraging SWFs to invest in well-diversified equity indexes in individual countries, such as the S&P 500 in the United States, may transform the role of these funds from stumbling blocks to stepping stones towards financial globalization.