Sovereign Wealth Funds: Their Investment Strategies and Performance

52 Pages Posted: 2 Dec 2008

See all articles by Vidhi Chhaochharia

Vidhi Chhaochharia

University of Miami - Department of Finance

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Date Written: September 2008

Abstract

Sovereign wealth funds have emerged as an important investor of global equity, attracting growing attention. Despite concerns that sovereign wealth fund investments may serve political objectives and be in conflict with national interests, little is known about the investment objectives and performance of sovereign wealth funds. We collect new data on foreign equity investments by sovereign wealth funds. We find that sovereign wealth funds largely invest to diversify away from industries at home but that they do so predominantly in countries that share the same culture, suggesting their investment rules are not entirely driven by profit maximizing objectives. Share prices of firms respond favorably when sovereign investment funds acquire stakes, in part because these investments often take place when firms are in financial distress. However, the long-run performance of equity investments by sovereign wealth funds tends to be poor, consistent with imperfect portfolio diversification and poor corporate governance.

Keywords: Asset allocation, Corporate governance, Sovereign wealth funds

JEL Classification: G3

Suggested Citation

Chhaochharia, Vidhi and Laeven, Luc A., Sovereign Wealth Funds: Their Investment Strategies and Performance (September 2008). CEPR Discussion Paper No. DP6959, Available at SSRN: https://ssrn.com/abstract=1308030

Vidhi Chhaochharia

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Luc A. Laeven (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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