Sovereigns Nearly Double the Size of Hedge Funds

Without much notice, sovereign wealth funds (SWFs) – those government-directed funds stuffed with Arab oil money or export earnings, as is the case with China – have grown in size to control almost twice the assets of hedge funds.

It’s more concentrated wealth, too.

Twenty-eight countries control now more than $2.8 trillion. Thousands of hedge funds have, comparatively, $1.7 trillion at their disposal.

Merrill Lynch thinks that such funds may grow to $7.9 trillion over the next three years. Morgan Stanley expects them to reach $12 trillion by 2015.

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The United Arab Emirates controls $500 billion to $875 billion, making it the largest sovereign fund.

Singapore and Norway both have more than $300 billion. Rounding out the top five are Kuwait and Russia.

China, despite the headlines for its buys on Wall Street of late, is just the sixth-largest sovereign fund, with only $68 billion formally dedicated to investments so far. The country has tens of billions more it could invest but hasn’t yet.

Some oil-rich countries less friendly to the United States sit on some serious cash, too. Venezuela has $16 billion, Iran $9 billion. One can only wonder what these countries do with these funds, since reporting is not required and neither country discloses their investment policies or holdings.

There is in some circles growing concern about the eventual use of sovereign money.

"The logic of the capitalist system depends on shareholders… It is far from obvious that this will over time be the only motivation of governments as shareholders," Harvard economist and former Treasury Secretary Larry Summers recently wrote.

Stephen Jen, an analyst at Morgan Stanley, believes that SWFs could enable countries to buy technology and know-how by making bids on foreign firms.

High-tech firms and foreign banks could be the primary targets of these funds, he wrote in May of last year. Since then, more than $20 billion has flowed into cash-strapped Wall Street firms.

SEC Chairman Christopher Cox questions the role that governments might play in corporate affairs.

"Another issue is the conflicts of interest that arise when government is both the regulator and the regulated,” he said. "When the government becomes both referee and player, the game changes rather dramatically for every other participant. "

As governments grow in importance in the investment community, the rules may very well change. How U.S. regulators used to overseeing corporate behavior will react to the changes remains to be seen.

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