Simply stated, a sovereign wealth fund (SWF) is a pool of money derived from a country’s reserves, which are set aside for investment purposes that will benefit the country’s economy and citizens. A more technical definition is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. SWFs are typically created when governments have budgetary surpluses and have little or no international debt. This excess liquidity is not always possible or desirable to hold as money or to channel into immediate consumption.
Sovereign wealth funds invest globally. Some sovereign wealth funds may be held by a central bank, which accumulates the funds in the course of its management of a nation’s banking system; this type of fund is usually of major economic and fiscal importance. Other sovereign wealth funds are simply the state savings which are invested by various entities for the purposes of investment return, and which may not have a significant role in fiscal management.
The accumulated funds may have their origin in, or may represent foreign currency deposits, gold, Special Drawing Rights (SDRs) and International Monetary Fund (IMF) reserve positions held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings. These are assets of the sovereign nations which are typically held in domestic and different reserve currencies such as the dollar, euro and yen. Such investment management entities may be set up as official investment companies, state pension funds, or sovereign oil funds, among others.
A more detailed explanation and review of Sovereign Wealth Funds can be found at http://www.sovereignwealthfundsnews.com/