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The Scariest Funds of All
The Scariest Funds of All
The Scariest Funds of All
the scariest
funds
of all
By Jack Ewing
Illustration by Scott Menchin
CREDIT HERE
053
Even among money managers, Gao Xiqing isn’t a household the Securities & Exchange Commission, said in a speech at
name. Yet the 54-year-old civil servant in Beijing oversees a Harvard University on Oct. 24.
pile of cash that would make any hedge fund manager swoon. While few funds so far have thrown their weight around in
Gao is general manager of the $200 billion China Investment pursuit of political and strategic goals, state-controlled com-
Corp., created this year to invest the mainland’s foreign cur- panies from the same countries have done so, and many fear
rency reserves in global capital markets. Don’t mistake him the funds will follow in their footsteps. Russia’s state-owned
for some faceless Chinese bureaucrat, though. He graduated energy giant Gazprom, for instance, cut off gas supplies to
from Duke University School of Law in 1986, spent two years Ukraine last year after relations between the two countries
with a big New York law firm, then went home to help craft cooled. In October, Industrial & Commercial Bank of China
China’s securities regulations. paid $5.6 billion for 20% of South Africa’s largest bank, and
It’s a combination that the global fi- last year state-owned oil company
nancial Establishment better get used CNOOC bought into a Nigerian oil field
to: a seemingly limitless pool of capital for $2.3 billion. Dubai funds, meanwhile,
overseen by Western-trained managers. have sought to bolster their hometown’s
U.S. officials have been fretting about reputation as a world financial capital—
China Investment Corp. and other so- and hone their investing skills—by taking
called sovereign wealth funds, calling stakes in NASDAQ and the London Stock
on such outfits to provide greater insight Exchange.
into their operations, but there’s little the If Western officials are worried about
West can do about these funds. Russia, the funds, they have only themselves to
the Persian Gulf states, China, and oth- blame. The insatiable appetite of Amer-
ers have amassed fortunes from exports icans and Europeans for oil and cheap
of gas, oil, or manufactured goods, and manufactured goods has flooded devel-
now they’re looking to supercharge the oping countries with foreign currency.
returns they’re getting from that money. Western policymakers have spent years
All told, these funds today control more pushing to open global capital markets,
cash than the world’s hedge funds com- creating the conditions that allow sov-
bined: $2.8 trillion vs. $1.7 trillion, according to Morgan Stan- ereign wealth funds to thrive. And as U.S. credit markets limp
ley. By 2011 that figure may hit $8 trillion or more. through the subprime mortgage crisis, the sovereigns may be
For Americans and Europeans, the big worry is what sov- the best place to go for financing. “The U.S. is going to have
ereign fund managers plan to do with their huge pots of cash. to import large amounts of capital from the rest of the world
Because their interests don’t always match those of the West, as long as there’s a big imbalance between what we save and
the looming question is whether they’ll simply go for maxi- what we spend,” says Robert D. Hormats, vice-chairman of
mum profit, or pursue more ominous political goals. The in- Goldman Sachs (International).
creasing economic clout of undemocratic governments could Saudi Arabia, China, and others have traditionally plowed
mean that “our markets will be less transparent, less yielding their reserves into U.S. government bonds earning perhaps
to outside law enforcement,” Christopher Cox, chairman of 5% annually, but they’re no longer satisfied with such paltry
054
returns. In the past year, investment operations controlled by
the emirate of Dubai have bought New York clothing retailer
Barney’s and German industrial packaging maker Mauser, SUPERSIZED SOVEREIGNS
and have taken 3% stakes in both Airbus parent EADS and Value of major national investment funds, in billions*
ICICI, India’s No.2 bank. The Government Investment Corp.
of Singapore, a country known for stubbornly pursuing its
own interests, owns some $80 billion in real estate assets
Abu Dhabi
$
900 Russia 133
$
1 1
the Asset Management Dept. in the Nor-
The funds could help stabilize Most are notoriously secretive wegian Finance Ministry, which oversees
markets because they invest about their activities, making other the country’s Government Pension Fund.
long-term and don’t need to cater investors guess what they’re up to (Despite its name, the agency doesn’t
2
to panicky clients actually pay pensions and is instead de-
055
in 2005, for instance, it left management in place. “We don’t hard for Western policymakers to argue that the sovereigns
have the resources to manage companies or spend months should be more open without imposing similar rules on hedge
finding replacement management teams,” says Sameer Al funds or private equity, which are generally no more transpar-
Ansari, CEO of Dubai International. ent. The best hope is that sovereign funds decide it’s in their
Western policymakers fret that, like hedge funds, no one interest to open up.
knows for sure what most sovereign funds are up to. Without One of the biggest victims of the rising power of the sover-
reliable information about their investment strategies and eigns could well be the dollar. As the funds shift their enor-
holdings, rumor mongering takes over, which can create tur- mous assets away from U.S. Treasury bills, for instance, one
moil in the markets. While Norway issues a detailed annual of the greenback’s biggest pillars of support could start to
report, the Abu Dhabi Investment Authority, with holdings crumble. And with the funds showing a strong preference for
estimated at as much as $875 billion, discloses almost no in- emerging-market assets, the dollar could suffer even more.
formation. Analysts assume most of the Abu Dhabi money is Indeed, many of the funds don’t seem very interested in buy-
in ultrasafe U.S. Treasury bills, but a recent Citigroup report ing in the U.S. at all. “Why would you want assets denomi-
said the fund also has extensive investments in Middle East nated in a declining currency?” asks Merrill Lynch economist
banks as well as two cement companies in the region. Through Alex Patelis.
its Mubadala Fund, with a value of some $10 billion, the gov- So far, the track record of the sovereign funds suggests they
ernment of the United Arab Emirates is also experimenting will move carefully to avoid provoking major opposition. Last
with riskier investments. In September it paid $1.35 billion for year, Dubai International Capital gave up an attempt to buy
a 7.5% stake in private equity firm Carlyle Group. the Liverpool soccer team amid fervent public opposition,
To counter concerns over the funds’ lack of transparency, though DIC cited price as its reason for withdrawing. And
U.S. and European officials are pressing the sovereigns to when Dubai was ready to seal a deal with Nasdaq, it spent big
disclose more about their activities. Leaders of the Group of money on Washington lobbyists and carefully briefed key leg-
Seven nations, meeting in Washington in October, asked the islators. “It’s not our country,” says Soud Ba’alawy, executive
International Monetary Fund to examine the issue—although chairman of Dubai Group. “Whether we like it or not, we have
it’s unclear what the IMF might be able to do. The goal in to adapt.” ^
pushing for more accountability is to head off harsher mea- –With Chi-Chu Tschang in Beijing, Assif Shameen in Singa-
sures that might hurt U.S. commercial interests abroad, says pore, Stanley Reed in London, Jane Sasseen and Emily Thorn-
Clay Lowery, Assistant Secretary for International Affairs at ton in New York, and Jason Bush in Moscow
the Treasury Dept. “We are worried about an over-reaction
leading to protectionism, putting up barriers in the U.S. to
legitimate investment,” Lowery says. In any event, it may be
By Eamon Javers executive of the Permanent Fund’s apartment building on East 87th Street
The huge wealth of sovereign funds has management corporation. in Manhattan, and stakes in four dozen
sparked lots of anxiety in Washington. Burns runs the outfit much like a private equity funds. All the details are
But one of the biggest such outfits is public pension fund in the Lower 48. publicly disclosed.
headquartered in Juneau, Alaska. Early on, it primarily invested in Treasury Although oil production in Alaska is
Since 1976, 25% of the state’s bills and corporate debt, but managers declining, the state contributed about
mineral and oil revenue has gone into have gradually embraced greater risk. $575 million in new petrodollars to the
the Alaska Permanent Fund. Now worth That shift allowed the Alaskans to dive Permanent Fund this year. But that
$40 billion, its goal is twofold: to gener- into venture capital and hedge funds, was dwarfed by the fund’s $5.4 billion
ate dividends for residents, and to build including a $40 million investment in in investment returns. The hefty payoff
up funds for the day when the oil runs Blackstone Capital Partners in 2005. is a sign that the fund—if not the state
out. In recent years, a small amount has Now, publicly traded stocks make up itself—is already weaning itself from oil.
also gone to pay for capital projects 53% of the fund, bonds 29%, real Burns points out that many sovereign
around the state. This year, the 604,000 estate 10%, and alternative assets, such funds around the globe face a common
Alaskans each got $1,654. “For a place as hedge funds, 8%. Alaska’s voters problem. “When you’re in the extraction
like Alaska, this is an extreme amount own, among other things, more than 7 business,” he says, “you know there’s an
of money,” says Michael J. Burns, chief million shares of General Electric, an end to what you can get from the earth.”
upi
Slug: sovereign46
Reporter/Writer: Ewing
NY Editor: Rocks
Copy Editor: Newman
COMPANY INDEX
(Do not delete the sentence above)
Duke University Law School (we show it’s School of Law) ... sure
law firm is Mudge Rose Guthrie Alexander & Ferdon, dotters show -- no need to name
Mauser as industrial packaging maker (dotters find it’s an arms maker) --different company. this one makes steel drums
tk-story AT&T center (dotters show it’s 60 stories) .. 60 is fine
Barclay’s (it’s Barclays) ... sure
Bob Diamond, chief operating officer (we show Robert E. Diamond, president and executive director) ... Robert E. Diamond Jr.,
president
Temasek fund (we show it’s Temasek Holdings) ... Temasek Holdings
1974 as year Temasek founded (dotters show 1975) ...1974
Citicorp (Citigroup?) ... citigroup
m.i. “S.” ok for Rogoff?
Abu Dhabi Investment Authority & Corp. (we don’t show the & Corp. but only Abu Dhabi Investment Authority) ...Abu Dhabi
Investment Authority is fine
Mubdala fund (we show Mubadala Fund) ... Mubadala fund (lc) is correct
The Carlyle Group (just Carlyle Group) ... no “the” is ok
Dubai Group (we show Dubai Group and Dubai International Capital both part of Dubai Holding) ...that’s correct
Dubai Investment Corp. (we show Dubai Investment Group) ... should be Dubai International Capital ...
DIC (DIG?) ... correct second ref for Dubai International Capital ...
So’ud Balawy (we show Soud or Saud Baalaway or Ba’alaway) ...Soud Ba’alawy, executive chairman of Dubai Group
suggested hed:
The New
Flags
Of Fortune
Sovereign funds from the likes of China, Russia, and the Mideast control $2.8 trillion——more than all hedge funds—and are
dramatically changing the global financial landscape
Banks and other financial players have been favorite acquisition targets for sovereign funds. It helps that such deals haven’t
created much opposition. But the funds also are interested in getting their hands on banks to gain knowhow and influence in
the West and to bolster their financial systems back home. Government-controlled Borse Dubai, for instance, is chasing a $6.5
billion deal that would give it a 20% stake in Nasdaq, in part because it wants to create a similar stock exchange in the Gulf. And
Dubai International Capital, also controlled by Dubai’s ruler, owns 3% of British bank HSBC, worth $6 billion. Borse Dubai also
has 20% of the London Stock Exchange while the Qatar Investment Authority has 15%.