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What Could a U.S. Sovereign Wealth Fund Look Like?

Natural resources, economic stability, and unique historical periods have all contributed to the development and growth of sovereign wealth funds (SWFs). The primary purpose of these state-owned funds is to manage national savings and invest state resources for the benefit of future generations. Norway’s Government Pension Fund Global, the world’s largest SWF, holds a 1.5% stake in globally listed companies. Like other major institutions, these funds are deeply integrated into financial markets, but they are distinct in being state-owned.

The idea that the U.S. could establish a SWF on par with Norway or Saudi Arabia might be more feasible than commonly assumed. While SWFs are typically associated with countries in surplus rather than a net debtor position like the U.S., the federal government’s asset base is substantial. Currently, more than three-fourths of the U.S. government’s total assets, amounting to $5.4 trillion, comprise the following:

1. $922.2 billion in cash and monetary assets,

2. $423.0 billion in inventory and related property,

3. $1.7 trillion in net loans receivable (primarily student loans), and

4. $1.2 trillion in net property, plant, and equipment (PP&E).

These assets suggest a solid foundation for a potential SWF, should the government choose to leverage them strategically. Not to mention the $100 trillion of estimated natural resource wealth the country controls which would benefit from a SWF structure. Establishing a U.S. sovereign wealth fund would face three primary challenges. First, there’s the question of funding. With the federal budget running a deficit for over 20 years, securing an initial pool of capital would be challenging. Second, the creation of such a fund would require bipartisan support in Congress, a significant hurdle in today’s polarized political climate. Finally, there’s the matter of defining the fund’s investment scope. According to the World Bank, it’s essential to limit the fund’s investments to those appropriate for a sovereign wealth fund. If investments generating quasi-market returns are permitted, the level of domestic investment bias should be clearly specified, with these investments reported separately.

The U.S. is not unfamiliar with the concept of a government investment body. Historically, it has not needed a sovereign wealth fund, as the Federal Reserve and the U.S. Treasury have been capable of managing long-term investments similar to those typically handled by wealth funds. According to Sarah Keohane Williamson, CEO of FCLTGlobal, these two entities already play a significant role in overseeing economic stability, managing foreign reserves, and ensuring government financing. The idea would not be far fetched as other developed economies in the 1970s and 1980s began their state owned fund which is still in operation today.

• Norges Bank Investment Management (1967): Originally set up to manage Norway’s oil revenue, this fund has grown into one of the largest and most transparent sovereign wealth funds, emphasizing long-term investments.

• Abu Dhabi Investment Authority (1976): Established by Abu Dhabi to invest its surplus oil revenue, this fund is among the world’s largest and primarily focuses on stable, long-term growth.

• GIC Private Limited (1981): Created by the Singaporean government to manage its foreign reserves, GIC seeks to achieve sustainable, long-term investment returns.

Several countries have established their SWFs based on their unique economic resources. For resource-based funds, Chile’s Economic and Social Stabilization Fund, valued at $21 billion, is backed by copper revenues, while Timor-Leste’s Petroleum Fund holds $17 billion, and Azerbaijan’s Oil Fund stands at $75 billion, primarily from oil income. Non-commodity-based funds include New Zealand’s Superannuation Fund, which manages $27 billion, Ireland’s Strategic Investment Fund at $12 billion, and India’s National Investment and Infrastructure Fund with $12.4 billion, each of which is aimed at securing long-term financial stability without relying on natural resource income.

SWFs will of course interact with other institutions and one of those being the state’s central bank. If the U.S. is exploring the possibility of establishing a SWF the Federal Reserve is to be implicated. One does not have to look far (across the ocean to be exact) where the Norwegian SWF is actually under management by the state’s central bank. In 2017 a government commission proposed that the Norway SWF should be spun off from central bank, although it never happened the proposal was due to several factors:

1. The fund’s significant growth (doubled in size over five years)

2. Different nature of activities between central banking and investment management

3. Need for specialized professional competence and governance for each function

Before we dive into how the Federal Reserve could be implicated much like the Norwegian Central Bank, the next section examines the different structure and scope of existing SWFs.

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Typical vs. Atypical Structures and Composition of Sovereign Wealth Funds

Management Structure

The Manager and Investment Company Models

In a typical SWF structure, the fund is generally owned by the government, either at the central or sub-national level, and is set up as a separate entity or fund manager owned by the state. This independence allows it to operate with a legal and institutional framework that insulates it from short-term political pressures. Governance structures in SWFs generally follow one of two models: the Manager Model, in which the Ministry of Finance owns the assets and delegates their management to a central bank similar to the structure in Norway, a separate government-owned fund management entity, or external private fund managers; and the Investment Company Model, where the fund operates as a standalone investment company with more direct control over its investment choices, seen in examples like Singapore’s GIC and Abu Dhabi’s ADIA. Key elements of SWF organization include a clear separation of responsibilities, a structured hierarchy for decision-making, control mechanisms, and a robust risk management framework, overseen by a supervisory board, executive management, and investment and risk management committees.

A comprehensive Harvard study (attached below) on the interaction between SWFs and institutions like central banks highlights several reasons some countries choose to house their SWFs within a central bank, ministry of finance, or treasury, though this setup is relatively uncommon. This model offers notable advantages. First, it leverages the expertise of central bankers or treasury fund managers, whose skills often align with the fund’s objectives, especially for stabilization or liquidity-focused funds. Additionally, when the investment strategy involves outsourcing, tracking benchmarks, or direct index investments, placing the SWF within an established institution can be more efficient and cost-effective, as these organizations already have portfolio managers, IT infrastructure, and established relationships with external managers. This arrangement also allows governments to limit fund managers’ discretion, making it easier to transfer operational responsibilities within the existing bureaucracy. Finally, SWFs managed through central banks often benefit from tax privileges, such as sovereign immunity in other countries—advantages typically unavailable to independent sovereign entities.

Hybrid Funds

Some SWFs adopt atypical structures, particularly hybrid models that combine multiple objectives, such as stabilization, savings, and development functions, which are common in developing economies, especially in sub-Saharan Africa. Additionally, certain funds use special purpose vehicles like subsidiary funds, direct investment arms, and specialized investment vehicles for targeted initiatives. Recent trends include developing internal direct investment teams to handle minority-stake deals, credit investments, and even majority control stakes in companies.

The implementation of a SWF’s investments is typically handled through detailed portfolio management practices, with strategic asset allocations, an investment policy framework, risk parameters, performance benchmarks, and compliance monitoring. Strong risk management remains critical, encompassing investment risk limits, operational controls, compliance procedures, and rigorous reporting. Ultimately, the effectiveness of an SWF’s structure is influenced by its policy objectives, investment horizon, risk tolerance, asset-liability alignment, and governance standards, ensuring the fund can meet both present and future economic goals.

Policy Objectives and Asset Allocation

While the management structure of SWFs can be a mixed bag the fund is usually characterized based on policy objectives and asset allocation. A study conducted by the IMF a few years ago laid out the five types of SWFs based on the Santiago Principles taxonomy. Of course each country’s circumstance will differ and evolve over time. Norway’s SWF, the world’s largest by assets under management, combines both stabilization and savings objectives.

• Stabilization Funds: These funds help shield a country’s economy and budget from swings in commodity prices and economic shocks, as seen with funds in Chile, Timor-Leste, Iran, and Russia. To support economic stability during boom-and-bust cycles, they are managed with liquidity and short-term needs in mind, much like central bank reserves. They mainly invest in liquid, low-risk assets, with over 80% in fixed income, and around 70% in government bonds.

• Savings Funds: Designed to pass wealth to future generations, savings funds transform nonrenewable assets into a range of financial investments. Examples include the Abu Dhabi Investment Authority, Libya, and Russia’s National Wealth Fund. These funds take on higher-risk investments, with over 70% in equities and other growth-focused assets.

• Development Funds: Created to fund key social and economic projects, especially in infrastructure (project finance), these funds target development goals. Notable examples include the UAE’s Mubadala and Iran’s National Development Fund.

• Pension Reserve Funds: These funds cover future pension costs, managing assets to meet expected liabilities from pension obligations, as seen in Australia, Ireland, and New Zealand. They generally hold large shares in equities to keep pace with rising pension costs.

• Reserve Investment Corporations: Aimed at offsetting the expenses of holding large reserves or earning returns on excess reserves, these funds seek higher returns through equities and alternative investments. Examples include funds in China, South Korea, and Singapore, with allocations of up to 50% in equities for South Korea and up to 75% for Singapore’s Government Investment Corporation.

A U.S. SWF would likely focus on either a Stabilization Fund or a Reserve Investment Corporation. A Stabilization Fund would allow the U.S. to buffer its economy against financial market volatility and economic shocks, providing a tool for economic resilience, especially in periods of recession or global instability. Managed with liquidity and short-term needs in mind, such a fund would prioritize liquid, low-risk assets like government bonds and fixed-income securities, much like central bank reserves, offering financial stability during economic downturns. Alternatively, a Reserve Investment Corporation could help the U.S. earn returns on its large foreign reserves by diversifying into equities and alternative investments. This type of fund would aim to offset the costs associated with holding large reserves, strategically investing in higher-yielding assets to provide additional financial stability. Both approaches align with U.S. goals of economic stability and fiscal resilience, making them probable focuses for a potential SWF.

While the specifics of the policy objectives and investment policy statement (IPS) are still up for debate, the most intriguing aspect will be the governance structure and whether the Federal Reserve will play a role in funding the investment vehicle.

A Helping Hand From the Federal Reserve

If the Federal Reserve were to be included as part of the management or ownership of a U.S. SWF there would be a few implications to consider.

The Federal Reserve would have oversight responsibilities under the Bank Holding Company Act (BHC Act) and the Change in Bank Control Act (CIBC Act), reviewing and approving certain investments, particularly those impacting domestic financial stability, while coordinating with the Treasury on foreign exchange operations. For investments involving ownership stakes above 10% in banks or bank holding companies, or those meeting corporate ownership thresholds, the Federal Reserve would conduct additional reviews to assess their impact on the banking sector.

Operationally, a U.S. SWF would likely function independently from the executive branch but with a mandate focused on risk-adjusted returns, echoing the Federal Reserve’s independent monetary policy approach. For funding, the Federal Reserve could support the SWF through direct capital injections, special bond issuances, or foreign exchange reserve management, although some operations could of course be done in house. Funding could also come in part from tariffs that former President Trump has promised would be levied on trading partners if he is elected in November. In an article from the Washington Post this morning, Trump claimed that imposing tariffs on all imports would generate enough revenue to eliminate income taxes, fund child care, and establish “the strongest sovereign wealth fund of them all.” In reality, however, the proposed tariffs would only amount to roughly 8 percent of current income tax revenue according to the post.

The article goes on to explain that a sovereign wealth fund could provide a president with access to funds without congressional oversight, but this arrangement could easily lead to misuse of the money. While an independent board could be established to manage the fund—similar to the Federal Reserve, which oversees Norway’s fund—there are concerns about its governance. For instance, Trump has previously contemplated dismissing the Fed chair. If the fund were to suffer losses on a significant investment or decline to finance a president’s preferred initiative, the consequences could be problematic.

In terms of oversight, the Federal Reserve could ensure SWF compliance with statutory banking requirements, assess the fund’s financial and managerial standards, and align investments with U.S. international financial policies, safeguarding the SWF’s integration into the broader financial system while upholding regulatory standards including adhering to annual stress tests often conducted in the financials sector.

While the Federal Reserve could assist with oversight and potential temporary funding for a SWF, a more nuanced approach is necessary regarding its structure and governance. Funding through tariffs is one possibility, and although Biden’s aides have emphasized a focus on key U.S. industries, the establishment of such a fund may still be some time away. However, it is not entirely out of reach, especially considering that the U.S. is already supported by various state-owned funds.

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