Wealth funds may eclipse US economy in value

The value of sovereign wealth funds (SWF) has skyrocketed to an estimated $3 trillion and could be bigger than the gross domestic product (GDP) of the US economy within a decade, according to a report by Morgan Stanley.

The US investment banks said SWFs have now amassed around twice the value of the total assets managed by hedge funds, estimated to be in the vicinity of $1.5 trillion.

Investments by SWFs have increased dramatically over the past year as governments in the Gulf and Asia look to invest record budget surpluses.

Driven by western banks' need for fresh capital, investments reached $24.4 billion in the first two months this year, already almost half the volume of last year, Dealogic data showed.

SWFs saw their investment surge 165% to $48.5 billion in 2007, compared with $19.2 billion in 2006 and $8.2 billion in 2005, according to Dealogic.

Morgan Stanley said that will such huge growth, the value of SWFs was on course to hit $12 trillion by 2015, roughly the size of the US economy's GDP.

SWFs have provided billions of dollars in emergency liquidity to a number of embattled US and European financial institutions, including Citigroup, Merrill Lynch, Morgan Stanley and UBS, forced to make huge writedowns due to the escalating subprime mortgage crisis.

Dealogic data showed SWFs have injected $54 billion in the financial sector since September.

News that the value of SWFs could overtake that of the world's largest economy will send shivers down the spines of many governments in the West, concerned that foreign governments may harbour political motivations when investing in the US and Europe.

The US last week signed a landmark deal with Abu Dhabi and Singapore, holders of two of the largest SWFs in the world, to free inward investment into the country.

Under the agreement the US receives assurances that foreign governments will not use their funds for political ends, while countries receiving investment from such funds accept any protectionist barriers to foreign direct investment should be dismantled.

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