Just when CEOs thought they had a handle on secretive and powerful hedge funds, they must consider a quieter but even bigger monster — Sovereign Wealth Funds.
These government-owned funds, including ones in China, Abu Dhabi, Kuwait and Singapore, represent more than $2.5 trillion in global assets, more than all of the world’s hedge funds combined. So far, they have been making huge but discreet investments, including $4.4 billion of Singapore government money to Merrill Lynch or $5.5 billion in Chinese funds to Morgan Stanley.
That may be a good deal considering how export-rich foreign governments can help prop up sagging U.S. financial giants with money they earned selling lampshades, clothing and cheap electronics to American consumers via Wal-Mart or Costco. But just as in the case of hedge funds, there are some big questions. Sovereign Wealth Funds are hardly regulated, if at all, and it may be hard for some CEOs to know when a fund controlled by a foreign government has taken a position in their firm.
Regulation should be light, according to testimony by Ethiopis Tafara, director of the Office of International Affairs at the U.S. Securities & Exchange Commission. In recent testimony before the U.S. Senate’s Committee on Banking, Housing, and Urban Affairs, Tafara said that SWFs aren’t always motivated by the same goals as strictly profit-oriented funds. He says that the SEC already has tripwires in place that let companies know when SWFs have bought heavily into their stock. Rather than regulating strictly, “a better approach might be to address the underlying issues of transparency, independent regulation, de-politicizing of investment decisions and conflicts of interest,” he said.
He praised the International Monetary Fund and the European Union for pushing forward with a code of conduct for SWFs.
Globalization means accepting foreign shareholders and advocating quick and efficient investments. If done properly, all sides benefit. But politics can never be completely extracted from the equation. U.S. regulators and CEOs must always be wary of what could be the hidden and detrimental agendas of foreign powers. They must not be allowed to use investments in U.S. firms to wield their strategic interests at the expense of the U.S. and they must be held accountable for their internal policies, such as human rights or environmental violations.
