Reevaluating the Roles of Large Public Surpluses and Sovereign Wealth Funds in Asia

This paper discusses the increasingly important roles of Asian official institutions in the new global financial landscape and the reasons that have led to the build-up of massive public surpluses. We re-examine the role of sovereign wealth funds (SWFs) as the de facto "global lender of last resort" during the recent financial crisis. Specifically, we analyze SWFs’ balance sheet characteristics, target allocations strategies, strategic agendas and political realities, management philosophies, and other real-world challenges, both before and after the crisis. Part of our analysis incorporates data which includes announced deals, regulatory filings, balance sheet information, and actual performance data made available by specific SWFs. We also point out a logical inconsistency in the common application of the Berk-Green alpha argument to the management of SWFs. For instance, the recent work done by Ang, Goetzmann, and Schaefer (2009) suggests limited or no evidence that alpha-seeking activities have impacts on SWF performance. We argue that the problem may be partially due to the choice of an appropriate performance benchmark for such large, non-commercial mandates. Finally, we propose a set of principles to construct a fair performance benchmark for SWFs.