by Shannon A. Murphy
Sovereign Wealth Funds (SWFs) account for a massive, and growing, source of global financial capital. SWFs hold about $ 5 Trillion of assets, nearly double the aggregated assets of the global hedge fund community. Sovereign Capital is markedly more concentrated among a relatively small number of Sovereign Funds (about 40) as opposed to the nearly 7,000 global hedge funds. The concentration and use of these resources has a considerable impact not just on the World’s capital markets, but on foreign policy as well.
This paper explores the extent to which SWFs are embodying a “Double Bottom Line” investment approach that allows them to reap financial as well as strategic benefits simultaneously. Some SWFs are not only earning excess financial returns, but have accrued political influence (“Intimidation by Implication”) and a greater ability to meet broader sovereign needs as a result of their size, positioning and investment patterns. Power theory helps to explain, in part, how and why a double bottom line occurs. Because SWF portfolio remains largely opaque, the paper relies on available public information about SWFs in China, Abu Dhabi and Qatar to examine the extent to which SWFs are benefitting from political and/or policy payoffs alongside financial returns.
Because some critics deem the use of SWFs to serve national strategic goals as potentially destabilizing to global financial markets, this is a controversial idea. Yet while state actors may merit a particularly watchful eye, their actions are in fact no more threatening than those of other market participants. SWFs are as legitimate a tool of statecraft as other financial foreign policy implements. SWFs are shaping a new normal in the global geoeconomics, in which states lacking the financial resources to pursue this double bottom line may find themselves at a disadvantage in foreign policy circles, and ultimately in the ability to serve the long term needs of their citizens. It is possible that in the 21st century, the market will not be guided by the “invisible hand”, but instead by Leviathan’s.