Sovereign wealth funds for macroeconomic purposes
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- CME Working Papers 
Sovereign wealth funds (SWFs) have become more numerous after the turn of the century, but the largest ones have been set up by non-democratic countries in the Middle East and Asia. Norway´s large SWF is an exception. In democratic societies, SWFs have been established in Australia, New Zealand and Ireland to pre-fund pensions in response to expected population ageing. The management of Norway’s Fund has been index-based, with only a very small role played by active management. In most other SWFs around the world, active management is much more important, and the cost of management is much higher than in Norway. The academic literature suggests that although active management could be worthwhile, many empirical studies do not support the belief that external active management generates excess after-fee returns. An empirical study of active management in Norges Bank finds that 70 percent of the (small) active management results from equity can be explained by other systematic risk factors than market risk. There is no strong consensus about how a global fund should diversify its assets among asset classes and currencies. We argue that SWFs could have positive macroeconomic effects in democratic welfare states if the government runs pension programs financed on a pay-as-you-go basis, and future population ageing is significant. Still, a SWF is hardly politically feasible if there is no broad agreement in the electorate and among political parties that fiscal surpluses and a SWF is worthwhile.