Sovereign wealth fund

Based on Wikipedia: Sovereign wealth fund

In February 2025, sovereign wealth funds from Oman, Qatar, Saudi Arabia, Singapore, and the United Arab Emirates quietly acquired stakes in the companies building the most powerful artificial intelligence systems on Earth: OpenAI, Anthropic, and xAI. This wasn't a hostile takeover. It wasn't even front-page news. But it represented something profound: governments accumulating ownership of the technologies that may reshape human civilization.

What exactly is a sovereign wealth fund? And why are nations around the world racing to build them?

The Simple Idea Behind Trillions of Dollars

At its core, a sovereign wealth fund is just a government-owned investment account. Think of it as a national savings account, but instead of sitting in a bank earning modest interest, the money goes to work buying stocks, bonds, real estate, and increasingly, stakes in cutting-edge technology companies.

The concept sounds straightforward. A country has more money coming in than it needs to spend right now. Rather than letting that surplus sit idle, or blowing it all on immediate consumption, the government invests it for the future.

But here's where it gets interesting.

As of 2020, sovereign wealth funds collectively controlled nearly eight trillion dollars in assets. To put that in perspective, that's roughly the combined annual economic output of Germany and France. These funds have grown from around four trillion dollars in 2008 to more than ten trillion by 2021. They're not just investment vehicles anymore. They're geopolitical instruments.

Where Does All This Money Come From?

Most sovereign wealth funds trace their fortunes to one source: stuff in the ground. Oil, primarily. Also natural gas, copper, diamonds, and phosphates. When you pump oil out of the desert and sell it to the world, enormous sums of money flow into government coffers. The question becomes: what do you do with it?

You could spend it all immediately. Build roads, hospitals, schools. Give everyone a government job. This is what Venezuela did under Hugo Chávez, and what Iran did under the Shah. The problem? When too much money floods into an economy too quickly, prices skyrocket. The currency strengthens so much that other industries can't compete internationally. Economists call this "Dutch disease," named after what happened to the Netherlands after they discovered natural gas in the 1960s.

So the smarter approach is to save a portion of those resource revenues. Invest them abroad, where they won't overheat the domestic economy. Let them grow over time. Draw on them gradually, or save them for future generations when the oil wells run dry.

This is the fundamental logic behind commodity-based sovereign wealth funds. Kuwait created the first one for a sovereign nation in 1953, funded by oil revenues, two years before they even gained independence from Britain. Today, that fund is worth $853 billion.

But Wait, Texas Got There First

Here's a piece of trivia that surprises most people: the first sovereign wealth funds weren't created by oil-rich Middle Eastern kingdoms. They were created by the state of Texas in the 1850s.

In 1854, Texas established the Permanent School Fund to benefit public education. They followed up in 1876 with the Permanent University Fund. Both were endowed with public lands. When oil was eventually discovered on those lands, the funds became substantial enough to matter.

The key insight here is that sovereign wealth funds aren't exotic foreign inventions. They're a sensible response to a simple problem: when you have a windfall, how do you make it last?

The Non-Oil Exception: China

Most sovereign wealth funds are funded by natural resources. China is the notable exception.

China's sovereign wealth funds entered global markets in 2007, and they aren't built on oil money. Instead, they're funded by something equally valuable in the modern economy: foreign exchange reserves. When China exports goods to the world and receives dollars in payment, those dollars accumulate. The government can convert them to other assets through a sovereign wealth fund.

China Investment Corporation, one of Beijing's main sovereign funds, has become a major player in global markets. It's one of several Chinese entities that other investors watch closely. When China Investment Corporation buys into a company, other institutional investors often follow, viewing the investment as implicitly safer because a major sovereign fund is involved.

Why "Sovereign Wealth Fund" and Not Just "Government Savings"?

The term "sovereign wealth fund" was coined remarkably recently. Andrew Rozanov first used it in 2005 in an article called "Who holds the wealth of nations?" published in the Central Banking Journal.

Before that, people distinguished between regular foreign exchange reserves, which central banks hold for short-term currency stabilization and emergency liquidity, and longer-term investment portfolios. But the line between them had been blurring for years. Many central banks accumulated reserves far in excess of what they needed for traditional purposes. They diversified into stocks, real estate, and other assets that had nothing to do with managing exchange rates.

The new terminology helped clarify what was actually happening: governments were becoming major players in global investment markets, and they needed to be understood as such.

Three Flavors of Sovereign Fund

Not all sovereign wealth funds serve the same purpose. They generally fall into a few categories.

Stabilization funds act as shock absorbers. Commodity prices are notoriously volatile. Oil might be $100 a barrel one year and $30 the next. A stabilization fund smooths out these swings. When prices are high, money flows into the fund. When prices crash, the government can draw on the fund to maintain spending without desperate budget cuts.

Savings funds are designed for future generations. The logic is simple: oil is finite. It will run out eventually. Why should the generation that happens to be alive when the oil is extracted get all the benefit? Norway's Government Pension Fund, one of the largest in the world, explicitly exists to save wealth for Norwegians who haven't been born yet.

Strategic investment funds pursue goals beyond pure financial return. Singapore's funds, including the Government of Singapore Investment Corporation and Temasek Holdings, partly exist to establish Singapore as an international financial center. South Korea's Korea Investment Corporation serves similar purposes.

Some funds combine multiple purposes. And some analysts argue that many funds exist for a fourth reason entirely: because having one is fashionable. A 2014 study suggested that sovereign wealth funds often get created because governments see their peers creating them and don't want to be left out.

The Day They Saved the Banks

Sovereign wealth funds proved their worth during the 2008 financial crisis. As global banks teetered on the edge of collapse, desperate for capital infusions, sovereign wealth funds stepped in quickly. Unlike government regulators, who had to debate, deliberate, and navigate political constraints, these funds were already active market participants. They could write checks fast.

This wasn't charity. They were buying distressed assets at bargain prices from institutions that had no choice but to sell. But it did help contain the damage in those critical early stages before government bailout programs could be organized.

The experience cemented sovereign wealth funds as major stabilizing forces in global finance. It also raised uncomfortable questions about foreign government ownership of American and European financial institutions.

The Transparency Problem

Here's what makes some Western governments nervous about sovereign wealth funds: we often don't really know what they're doing.

How big is the fund exactly? What is it invested in? Who makes the decisions? What are the internal controls? When a sovereign fund takes a stake in a company, is it a financial investment or a strategic move to gain influence over a critical industry?

The opacity varies dramatically. Norway's Government Pension Fund publishes detailed reports and maintains one of the most transparent operations in the world. Other funds disclose almost nothing.

This lack of transparency creates risks. Investors don't know what they're competing against. Regulators can't assess systemic risk. And when things go wrong, there's no warning.

Critics have called sovereign wealth funds "the new hedge funds," referring not to their investment strategies but to their secrecy and potential to destabilize markets without anyone seeing it coming.

The Santiago Principles

To address these concerns, something remarkable happened in September 2008. Representatives from major sovereign wealth funds gathered in Santiago, Chile, to establish voluntary standards for how these funds should operate.

The result was the Santiago Principles: twenty-four guidelines covering transparency, independence, and accountability. The International Monetary Fund helped facilitate the process. A new organization, the International Forum of Sovereign Wealth Funds, was created to maintain the standards going forward.

As of 2016, thirty funds representing about 80 percent of total sovereign wealth fund assets, roughly $5.5 trillion, had formally signed on to the principles.

But here's the catch: the principles are voluntary. There's no enforcement mechanism. A fund can sign up to the principles and then ignore them without consequence. The Santiago framework is better understood as a diplomatic gesture than a binding regulatory regime.

National Security Concerns

In 2007, the United States passed the Foreign Investment and National Security Act. The worry was straightforward: what if a foreign government uses its sovereign wealth fund to buy strategic American companies not for financial return, but for political leverage?

Imagine a foreign government owning critical infrastructure, defense contractors, or technology companies with national security implications. The investment might look purely commercial on the surface while actually serving geopolitical objectives.

Lawrence Summers, who served as U.S. Secretary of the Treasury, warned that wealthier foreign funds could potentially seize control of American assets, shaking what he called "capitalist logic." The European Union considered whether to allow member states to use "golden shares," a mechanism to block foreign acquisitions, but largely backed away from this for fear of triggering international protectionism.

Germany went further. In 2008, they passed a law requiring parliamentary approval for foreign investments that threaten national interests, specifically targeting acquisitions of more than 25 percent of voting shares by non-European investors.

The Committee on Foreign Investment in the United States, known as CFIUS, reviews foreign investments for security concerns. It's been increasingly active in scrutinizing deals involving sovereign wealth funds, especially those from China.

When Sovereign Funds Fail

Not every sovereign wealth fund story is a success. Several have gone bankrupt.

Algeria's Revenue Regulation Fund, Brazil's Sovereign Fund, Ecuador's multiple sovereign fund arrangements, Papua New Guinea's Mineral Resources Stabilization Fund, Venezuela's FIEM and FONDEN: all depleted.

The primary cause isn't usually bad investment decisions. It's political instability. When governments become desperate, when regimes change, when populist pressures demand immediate spending, the carefully accumulated savings get raided.

This creates an interesting risk for countries that receive investments from sovereign wealth funds. If the fund's home country becomes politically unstable, those investments might suddenly be liquidated to deal with domestic crises. Stability of the investing country matters as much as stability of the assets themselves.

Countries like Denmark, Qatar, China, and Australia are unlikely to see their funds depleted precisely because their political systems are stable enough to resist short-term temptations. Venezuela, on the other hand, couldn't resist.

The Rules of the Game

Most sovereign wealth funds operate under explicit rules designed to prevent political raiding. These typically cover three areas.

Accumulation rules specify what portion of government revenue must be saved rather than spent. If oil revenues exceed a certain threshold, for example, the excess might automatically flow to the fund.

Withdrawal rules govern when and how the government can take money out. Some funds require supermajority votes in parliament. Others limit withdrawals to genuine emergencies or specified purposes.

Investment rules determine where the money can go. Some funds are prohibited from investing domestically to prevent political interference. Others are required to diversify globally. Many have ethical investment policies that exclude certain industries or countries.

The purpose of these rules is to tie the government's own hands. Future politicians will face temptation to spend the accumulated wealth. The rules make that harder.

The American Sovereign Wealth Fund

In February 2025, President Donald Trump signed an executive order directing the creation of a United States sovereign wealth fund within the next year.

This is a remarkable development. The United States has never had a national sovereign wealth fund, though several states have them. Alaska's Permanent Fund, created in 1976 to distribute oil revenues to residents, is probably the most famous. Texas still has its education funds from the 1800s.

What would an American sovereign wealth fund invest in? How would it be governed? Would it pursue pure financial returns or strategic national interests? These questions remain unanswered.

The announcement came just days after Indonesia unveiled its own new sovereign fund, Danantara, expected to manage $900 billion in assets. The first wave of investments would target natural resource processing, artificial intelligence, and energy and food security.

The AI Connection

Perhaps the most interesting frontier for sovereign wealth funds is artificial intelligence.

Beyond simply investing in AI companies, some analysts have proposed using sovereign funds to manage the social and economic disruption that automation might cause. The idea works like this: if AI eventually displaces large numbers of workers, governments will need resources to support affected populations. A sovereign wealth fund that owns equity in AI companies would capture some of the gains from automation. Those returns could fund universal basic income, retraining programs, or other social safety nets.

This is speculative, but the stakes in AI companies by Middle Eastern and Asian sovereign funds suggest governments are already positioning themselves. When a sovereign fund buys into OpenAI or Anthropic, it's not just seeking financial returns. It's acquiring a stake in technologies that might fundamentally reshape economies and societies.

Strategic infrastructure investment, equity stakes in AI leaders, distribution of AI-derived returns: these aren't abstract policy proposals anymore. They're happening.

The Bigger Picture

Sovereign wealth funds represent something important about how power is shifting in the global economy.

For decades, the story of global finance was largely about private capital. Investment banks, hedge funds, private equity firms, pension funds: these were the major players moving money around the world. Governments set rules and occasionally intervened, but they weren't typically active participants in the investment arena.

Sovereign wealth funds change that equation. Now governments themselves are major investors, with stakes in companies across every industry and every country. The line between public and private capital has blurred.

This creates new possibilities and new risks. Governments can use their investment power to pursue national interests, support strategic industries, and stabilize their own economies against external shocks. But they can also distort markets, pursue political agendas under the guise of financial returns, and accumulate influence that makes other nations uncomfortable.

The ten trillion dollars in sovereign wealth fund assets isn't just money. It's a new kind of national power, one that operates in boardrooms rather than on battlefields. How that power gets used, and by whom, and with what transparency and accountability, will shape global economics and politics for decades to come.

The governments writing the biggest checks are positioning themselves for a future they're betting they can own.