Investment strategies of sovereign wealth funds: the potential and challenges of empirical research
| Date | 08 March 2023 |
| Pages | 445-468 |
| DOI | https://doi.org/10.1108/JFRC-09-2022-0115 |
| Published date | 08 March 2023 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Abdulaziz K. Alosaimi,Mishari M. Alfraih |
Investment strategies of sovereign
wealth funds: the potential and
challenges of empirical research
Abdulaziz K. Alosaimi and Mishari M. Alfraih
Accounting Department, Public Authority for Applied Education and Training,
Kuwait City, Kuwait
Abstract
Purpose –The purpose of this paper is to explore and evaluatethe main segments of existing empirical
literature related to SovereignWealth Funds (SWFs) and provide a thorough investigation of their research
questions,theoretical frameworks, data selectionsand research methodologies.
Design/methodology/approach –The literature on SWFs has been split into three main streams:
qualitative studies with theoretical contributions aiming to conceptualize the phenomenon of SWFs;
normative assessmentsof the optimal asset allocations of SWFs; and empiricalworks that aim to investigate
different perspectivesof SWFs. The paper attempts to review the state of existing literature relatingto these
areas by answeringspecific questions.
Findings –Despite their significantsize and potential impact, the literature onSWFs seems to be still in its
infancy.The paper collects insights from previous literature, addressesits difficulties and challenges.
Research limitations/implications –The characteristics of the previous empirical literature and the
challengesfacing this line of research offer an insightful thoughtfor the future research works in this topic.
Originality/value –The paper offers a thorough assessmentof the existing empirical research on SWFs
and shade some lighton the techniques and procedures used.
Keywords Sovereign wealth funds (SWFs), Government investment, Investment strategies,
Literature review
Paper type Research paper
1. Introduction
Over last few decades, through holding and managing substantial foreign investments in
major asset classes, sovereign wealth funds (SWFs) have become a key player in
international financial markets.The assets under SWFs’management were in excess of US
$10tn as of August 2022 (SWF Institute, 2022). SWFs operate as governments’investment
vehicles whose main objective is maximizing their sponsor countries’risk-adjusted return.
These government-owned funds might also aim to achieve a range of macroeconomic and
national development objectives. SWFs differ in their organizational structure, legal
identity, investment objectives, asset management style, governance practice and
transparency. However, they are still considered as a homogenous group of institutional
investors that sharingspecific characteristics.
The literature on SWFs and their implications has grown rapidly over last two decades.
Since the financial crises (2007–2008), professional as well as academic institutions have
started to pay more attention to this phenomenon with attempts by a number of
international economic organizations, such as the International Monetary Fund (IMF) and
the Organization for Economic Co-operation and Development, to build a conceptual
framework of SWF activities. The literature documents various characteristics of this
Investment
strategies
445
Received27 September 2022
Revised5 January 2023
Accepted19 January 2023
Journalof Financial Regulation
andCompliance
Vol.31 No. 4, 2023
pp. 445-468
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-09-2022-0115
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
sizeable class of investors and covers the many issues relating to their activities from
different perspectives. However, compared to other institutional investors with even less
wealth under their management, such as hedge and private equity funds, the academic
research on SWFs is still in its infancy and the majority of the studies are descriptive in
nature, using exploratory qualitative methods that usually result in similar conclusions
(Ping and Chao, 2008;Aininaand Mohan, 2010).
How Do SWFs Work? It may not be obvious a priori what exactly the determinants of
SWFs’investment strategies are. SWFs’specific organizational features, the sovereign
ownership of the fund and their politico-economic objectives may make their investment
strategy different from simplypursuing optimum risk-adjusted returns. These fundamental
questions relating to the investmentstrategies of SWFs ought to be empirically assessed in
proper way.
This study aims to explore and evaluate the main segments of existing empirical
literature and to provide a thorough investigation of their research questions, theoretical
frameworks, data selectionsand research methodologies. This paper shall help in shedding
some light on the techniques and procedures on how to construct a suitable approach in
studying these government owned investment institutions. This assessmentof the existing
literature aims to highlight the challenges as well as the possible research opportunities in
this field. It also can guide the future empirical research on this topic, as well as, on other
kind of institutionalinvestors with special nature.
The remainder of this paper is organizedas follows: Section 2 gives a brief background of
SWFs, while Section 3 reviews the organizational and governance structure of SWFs.
Section 4 outlines the data and research methods. Section 5 lays out a general reviewof the
SWFs’academic literature. Section 6 assess carefully the process and methods used in
related empirical studies. Finally, Section 7 presents the summary and concluding
comments.
2. Why does a nation set up a sovereign wealth fund?
The story of SWFs began in 1953, when the Kuwaiti governmentestablished the first state-
owned investment fund. Kuwait,a major oil producing country, was seeking to diversify its
economic resources and reduce its reliance on a finite natural resource, a number of
countries have taken similar steps for similar reasons. Last three decades have seen a vast
growth in the number and size of SWFs that has been seen as reflecting the rise in
commodity prices (mainly oil) and large accumulated foreign reserves resulting from
surplus in the balance of foreign trade.Although the original idea behind establishing SWFs
was to create an alternativeeconomic source, several SWFs have been officiallytasked with
a wide variety of national developmentassignments.
SWFs are state-owned investment vehicles. Their legal identities vary widely from
public authorities supervised directlyby the ministry of finance or central bank to separate
investment banks. While foreignreserves are usually invested in fixed-income instruments,
SWFs maintain a higher risk tolerance with portfolios that include a wide range of asset
classes.
The main stated objective of most SWFs is to maintainlong-term economic stability for
the sponsor nation through diversifyingits economic resources (Kotter and Lel, 2011). SWFs
could also preserve macroeconomic stability during business-cycle troughs, mainly in
economies that are highly dependent on oil and gas exports, since they are exposed to
fluctuations in global energyprices (Afyonoglu et al.,2010).
Factors such as overall high oil prices over recent years have resulted in the
accumulation of an enormous amount of wealth for a number of oil exporting nations.
JFRC
31,4
446
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