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Sovereign wealth funds: The $2 trillion investor

The sheer size and influence of sovereign wealth funds is attracting attention – not all of it positive.

China announces that it will issue bonds worth $200 billion to capitalize its new investment fund. The Qatar and Dubai governments agree a deal to set up a new vehicle looking at international and regional investment opportunities. The Abu Dhabi authorities spin off a new investment arm, the Abu Dhabi Investment Council, from the Abu Dhabi Investment Authority (Adia).

Not a week goes by without a sovereign wealth fund grabbing the headlines. These vehicles, which are government run, are not new. Adia, for example, was set up more than 30 years ago. What is new is the number of these funds and their sheer size and influence. They have assets, built either through commodity exports or foreign exchange reserves, of between $1.5 trillion and $2.5 trillion, according to analysts. As such they are among the most important investors in the international financial markets.

The speed at which these funds are accumulating assets is providing much food for thought. Traditionally, they have invested in low risk assets: US treasuries, US agencies, European sovereign bonds. They continue to do so. But there is nowhere near enough new supply of these assets to satisfy their demand.

Last year, according to the US Treasury, net issuance of traditional reserve assets totalled $461 billion.

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