SINGAPORE: Sovereign wealth funds (SWFs) are currently worth about 1.3 percent of total global financial assets. But at US$2.2 trillion, they have surpassed the value held by private equity and hedge funds.

Based on current trends, studies suggest that sovereign wealth funds will overtake forex reserves and grow to about US$13 trillion in the next decade.

Recent massive injections in large banks like Merrill Lynch attest to the positive and stabilising force that sovereign wealth funds wield as they have provided sorely-needed cash and helped to avert a collapse in global financial houses.

Tony Tan, deputy chairman & executive director, Government of Singapore Investment Corp, said: "If they were not able to raise capital from SWFs, where's the capital to come from? There's no option for them, they need capital."

Khoo Chen Hsung, vice-president, CIMB-GK Research, said: "We live in a global world right now and capital is always moving from one point to another. And with Asian economies doing very well, benefiting from trade surpluses, they've accumulated lots of capital. Capital definitely has to flow somewhere.

"SWF is an interesting vehicle to recycle those savings into strategic investments for respective governments. At the same time, it benefits the foreign entities they're investing in because, as you can see right now, some Wall Street banks do need capital and having a good long-term investor in the future is beneficial, not only for the country but for global financial markets."

The influence of sovereign funds is likely to grow, with high oil prices and expanding foreign exchange reserves beefing up their capital.

Some see the potential in this massive capital to act as long-term money that can balance out today's shorter term investment horizons.

Mr Khoo said: "With the advent of hedge funds in recent times, a lot of new market participants have been short term in nature. (There's) a lot more market volatility in recent years, so it's good to have the SWFs in the picture because these funds by nature take a longer term and strategic angle to their investments.

"So you get a diversification of investors globally. The growth of shorter term investor population is beginning to see some balance of longer term investors entering the picture."

Simon Israel, executive director, Temasek Holdings, said: "I do think that sovereign wealth investors can be a stabilising force in financial markets. They tend to be 'patient' capital - in the sense that they're not worried about the quarterly result or daily share price.

"They work in a different time horizon. As patient capital, you can give management the opportunity and flexibility to drive business in the way they wish to create value versus the typical short term of the market."

Ho Yew Kee, vice dean, Finance & Administration, National University of Singapore, said: "In most cases, the sovereign fund can bring with it expertise, network because if a sovereign fund is a big fund manager, it has money, it brings with it the connections and network of entire country too."

Still, there are those who wonder if this may have the undesired effect of encouraging riskier trades.

Gerard Lyons, chief economist, Global Research Group Head, Standard Chartered Bank, said: "There are already issues of whether the sovereign funds, not always driven by commercial factors, will send misleading signals to the market... such as misallocation of capital and their overall impact on financial stability.

"But the reality is that SWFs are going to have a big role in areas such as emerging markets where they will take bigger stakes. I think they'll start to allocate more money into alternative investments such as private equity and hedge funds."

Analysts said this is where a code of conduct would come in handy to keep sovereign funds aware of their own influence.

Currently, funds belonging to countries like Norway and Singapore are seen as leaders in transparency and accountability.


- CNA/so