Sovereign wealth fund (SWF) - Financial definition
Financial acronyms
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Concise definition of the term sovereign wealth fund
From an international tax standpoint, there is no conventional definition of an SWF. This term generally refers to a state-owned fund which invests in a variety of real or financial assets (stocks, bond, real estate, commodities and other financial instruments).
Comprehensive definition of the term sovereign wealth fund
SWFs are usually created when governments have budgetary surpluses and little or no international debt. It is not always possible or desirable to hold this excess liquidity as money or to channel it into immediate spending.
This is particularly the case when a nation depends on the exportation of raw materials like oil, industrial or precious metals or gems. The revenues generated by these resources tend to be volatile, their extraction difficult to predict and the size of existing reserves uncertain.
In contrast to the foreign exchange reserves held by central banks as an instrument for short-term currency stabilization and liquidity management, sovereign wealth funds try to maximize the long-term return of their shareholder (the sovereign state) and, generally, have no (significant) role in the monetary policy of the respective state.