When Should a Country Establish a Sovereign Wealth Fund?

ActiveAllocator has researched the economic conditions of countries with SWFs prior to their establishment. Our objective has been to uncover economic conditions in place to help determine the timing for the creation of future SWFs. We chose key relevant  budget and balance of payment economic ratios from 18 countries, and focus our analysis on the five years prior to the inception of each country’s respective SWF. These ratios, many normalized for GDP, are the GDP growth rate, inflation, fiscal balance, trade balance, financial account, current account, foreign exchange reserves and levels of external debt. To bring specificity to context I also compared a particular nation’s (name anonymized) ratios that is now considering establishing a SWF, with summary ratios from other countries that have already established SWFs. The exercise provides both summary and individual indicators at the time prior to establishing a SWF. It may also serve as a framework for policy makers considering setting up new SWFs.

Our findings reveal, there is no ideal timing or any one measure that must be at a certain level to create a SWF.  In fact, many countries have created SWFs in the face of deficits, inflationary periods and low growth.  However, in most cases, the overall economic picture was pointing in a positive direction prior to inception.

Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech ActiveAllocator.com, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

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