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Does the Fed view Sovereign Wealth Funds as greater fools?

August 6, 2008

Analysis of:Sovereign Wealth Fund Assets Could Triple by 2013 | www.bloomberg.com

As Sovereign Wealth Funds (SWF) triple by 2013, the question for investors is "Where will the money go?" At a conference this spring at Stanford, I discovered that the Fed thinks SWF investors may not be the sharpest knives in the drawer when it comes to investing in U.S. financial services firms. Unless SWFs start to make money off of their investments, they may wise up. And the expensive tuition payments for SWF investors from those losses may make it difficult for Wall Street to raise more money as they continue to write-down the value of their asset-backed securities. And if hedge funds want to capture a share of this SWF money, they will need to get a more specific understanding of what motivates the different SWF investors. Some SWFs are very clear about their objectives and practices while others are far more secretive. Hedge funds will need to know which is which if they hope to tap the trillions of dollars worth of capital in these funds over the next five years.

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