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Rising clout of SWFs
April, 17th 2008

Till recently, hedge funds were the bogeymen for the target companies, especially for the management and staff of companies in emerging economies that they inevitably displaced sooner than later once in the saddle. But for a change the western world is shaking in its boots at the growing popularity and resources of Sovereign Wealth Funds (SWFs).

To be sure, unlike hedge funds, SWFs havent so far shown any intrusive or destabilising tendencies a fear constantly gnawing the developed world resulting in the IMF not only getting seized of the matter but examining all their activities with a fine-tooth comb. That Singapores Temasek, Abu Dhabis Abu Dhabi Investment Corporation (ADIC) with a massive corpus of $1500 billion and Norways fund have passed the preliminary scrutiny on the touchstone of transparency doesnt however mean that the western worlds paranoia of SWFs has been overcome.

Oil exporters join in

Taking a cue from Norway, the oil exporting nations jumped into the SWF bandwagon so as to get a better yield on their massive foreign exchange reserves that were otherwise parked in low-yielding US bonds. China joined the fray last year with a modest corpus of $300 billion buoyed by a burgeoning foreign exchange reserves that have breached the $1.5-trillion mark. With a current account surplus of $500 billion, China could very well afford to do so.

As of now, SWFs reportedly have pumped in close to $3 trillion, surpassing the hedge funds whose exposure in the world financial markets is estimated at around $1.6 trillion. But the growing size of SWFs funds estimated to cross $12 trillion by 2012 is what is making the western world uneasy, especially given the fact that there are no signs of abatement in oil prices that add immensely to the financial clout of the oil exporting nations which dominate the SWF club.

Fear over control

But what bothers the western world more however is the distinct possibility of the nascent SWFs, which now account for about 5 per cent of the $55 trillion world stock market volume, turning into 800-pound gorillas, thus becoming the movers and shakers of the financial world displacing the assorted institutions that currently hold sway.

That precisely is why the searchlight is focused on their activities. But the US in particular would not have the moral courage to ask for rules and regulations to rein in the potentially intrusive SWFs given its own indulgence all these years to hedge funds by allowing them to function untrammelled by regulations.

S. Murlidharan
(The author is a Delhi-based chartered accountant.)

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