The idea of a U.S. sovereign wealth fund is becoming increasingly popular, with support in both parties. President Trump recently signed executive order 14196 to devise a plan for a sovereign wealth fund. While campaigning, he noted such a fund could “invest in great national endeavors for the benefit of all of the American people.” Previously, the Biden administration was also working on a sovereign wealth fund proposal. 

So how could this work in the U.S.? What are the pros and cons? Let’s get into it.

What is a Sovereign Wealth Fund?

A Sovereign Wealth Fund is a pool of investments owned by a country. Similar to how an individual might have an investment account, a sovereign wealth fund invests savings with the goal of achieving returns. One difference with a sovereign wealth fund is it also may have national strategic objectives as well. 

Take Norway, for example. Norway’s sovereign wealth fund, profiled below, is more than 2x the size of Berkshire Hathaway and 40x the Harvard endowment. An oil-rich country, Norway takes surpluses gained from proceeds from oil and invests them in a sovereign wealth fund with stocks, bonds and other investments. 

While the U.S. doesn’t have a sovereign wealth fund, several states like Alaska and California do. The biggest reason the U.S. doesn’t have one? It doesn’t have surpluses to invest as it is ~$36 trillion in debt. 

How would a U.S. sovereign wealth fund be funded?

Despite not having trade surpluses, there are sources of money the U.S. could use to fill the sovereign wealth fund. 

• Income from tariffs, existing and newly imposed ones, is a top source Trump mentions.
• Seized assets from criminal enterprises, including cryptocurrency, is also a potential source.
• Another potential source floated by Trump is proceeds from a potential new license to allow TikTok to operate in the U.S.
• Proceeds from sales of federal lands and buildings.
• If the government is the lender of last resort, as it has been for companies like GM in the past, it could take equity which could become part of the fund

Of course, if the government is able to achieve surpluses by a combination of either cutting expenses and/or increasing revenue, that could be funneled into the sovereign wealth fund. Notably, the U.S. has not achieved a budget surplus since 2001.

It is also possible the fund could subsume funds from other existing sources to manage such as the social security fund (which typically only receives about 3% returns via bonds). 

Set up and Governance: How would a sovereign wealth fund actually work?

Setting up an American sovereign wealth fund would be complex and likely require going through Congress.

It’s unclear who would advise and/or manage the fund. Some have suggested a rotating head. 

Some names floating around as potential managers include billionaire financiers such as current Trump advisor John Paulson as well as David Tepper, Stan Druckenmiller,  Ken Griffin, John Doerr, Mike Moritz, and Bill Gross. 

Keeping management of the fund independent of politics is key to governance but may be hard to realistically accomplish.

How would funds be allocated?

Typically funds in sovereign wealth funds are invested in stocks, bonds, or infrastructure projects. Trump has proposed using the funds for highways, airports, manufacturing hubs, and medical research. 

"We'll create America's own sovereign wealth fund to invest in great national endeavors for the benefit of all of the American people. Why don't we have a wealth fund? Other countries have wealth funds. We have nothing." Trump said in a talk to the Economic Club of New York.

While a U.S. fund would focus on American companies for the benefit of American people, sovereign wealth funds often invest outside of their country in seek of the best return. Saudi Arabia’s sovereign wealth fund, PIF (Public Investment Fund), has invested in Uber, the Heathrow airport, Nintendo, MagicLeap, Hollywood Studios, French hotels and SoftBank private equity funds. It also invests in large scale infrastructure projects such as new Saudi cities in order to diversify into other industries like tourism and tech.

How could the returns be used?

If the fund successfully returns gains, how could they be used?

• For one, it could be used to pay down our massive debt. Trump believes the fund will generate so much return, it will help pay down the national debt.
• Another use could be to pay for government services (which would reduce tax burden)
• Other countries have proposed ideas such as providing people a credit to help purchase their first house.

Expected Rate of Return

Since the U.S. currently pays about 5% interest on its debt, any returns would need to be higher than that to make more financial sense (otherwise, paying down the debt directly would be a better use). So the hurdle rate currently for a fund would be 5%. It’s adding risk to the balance sheet of America with the hope that gains from the fund would beat interest rates.

Pros

• Increases economic value of assets that America holds anyway which can be used in many ways to improve the country
• Could help shape long term industry policy and strategy, which has not been a strength of the U.S.
• Reduce tax burden on Americans
• Reduce national debt
• Counterbalance the increasing power of other countries' sovereign wealth funds which are investing (and thus gaining geopolitical power and influence) in other regions of the world. 

Cons

• Potentially ripe for political self dealing and crony capitalism which could hurt the economic returns of the fund and the strategic impact.
• Could be used inappropriately by politicians to fund non-optimal projects
• May distort the financial markets, and have unintended consequences such as overheating the economy
• Central planning to allocate the capital may be less efficient than putting the money back into the economy
• May not be necessary because the U.S. can still invest in industrial policy, infrastructure and projects through other mechanisms.
• Assets that potentially generate high returns, like say equity of a tech company, are inherently risky and could lose money as opposed to the guaranteed benefit of reducing debt or taxes.
• There could be an inefficiency and bureaucracy drag like many government projects due to administrative bloat
• Could just be transferring returns that citizens would earn to the government

What countries have a sovereign wealth fund?

There are ~100 sovereign wealth funds currently in existence totalling over $10 trillion in value. Some of the largest funds include Saudi Arabia, Kuwait, China and Norway. Several western-style countries such as Australia, Korea, and Canada and Ireland have funds as well. 

Ireland actually has 2 sovereign wealth funds. Its returns are so strong, a big concern is the government spending too much of the fund which could overheat the economy.

Case Study: Norway

Norway's sovereign wealth fund, Government Pension Fund Global run by Norges Bank, is currently a ~$2 trillion fund making it by far the largest sovereign wealth fund.

• Primarily funded by Norway oil profits
• Tripled in value in the last decade
• Grown at 6.34% since inception in 1998, growing as much as 16% in some years
• Allocates approximately 71% stocks, 27% bonds, 2% real estate, and 0.1% renewable infrastructure projects
• Spread across several markets, currencies, and countries for a diversified portfolio.
• Up to 3% of the fund is taken out each year to pay for government services (lessening the tax burden on citizens)
• Each Norwegian owes a small slice of the fund
• Only invests outside of Norway to avoid overheating the domestic economy

Sovereign Wealth Fund Failures

There are certainly cases of sovereign wealth funds not working out well. Several underperform the broader market. Others like Malaysian's 1MDB fund, turn out to be corrupt operations.

Conclusion

As the discussion progresses on a U.S. sovereign wealth fund, it will be important to take into account the differences in our economic situation versus other countries with successful funds. If successful, a sovereign wealth fund could be an economic boost for the country. But this is far from given due to the inherent risk of investments and the U.S. government’s lack of experience in this area.