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FINANSMARK-Finansmarkedet

Metrics for measuring performance of Sovereign Wealth Funds' cross-border investments

Awarded: NOK 0.41 mill.

Project Number:

204313

Project Period:

2011 - 2011

Funding received from:

Subject Fields:

Partner countries:

Some Sovereign Wealth Funds (SWF) in small oil exporting countries differ from traditional institutional investors since they are only allowed to make cross-border investments and thereby are forced to take foreign exchange risks. How can traditional port folio investment theory be extended to cover this special case? Is there any risk free investment alternative for such sovereign investors? How to measure risk and return of a global investment portfolio if the home currency of the sovereign investor is e xcluded from the investment universe? Should the modelling of the strategic asset allocation and the reporting of investment performance be undertaken in the home currency of the sovereign investor or in a foreign currency or in a basket of foreign curren cies? How to report real returns? The purpose of this research project is to develop a theoretical model to analyse these questions. The model is developed in three steps by looking at: 1. the case of Norway (small economy, withdrawals from fund linked to real return), 2. the case of Timor Leste (same fund mechanism as Norway but withdrawals linked to permanent income from the sum of real assets (oil) and fund capital), 3. the case of Brazil (SWF about to be established, large economy, significant ext ernal debt, emerging domestic financial markets, large pool of real assets). Finally, the effectiveness of the model is studied empirically by using a unique historical data set on the strategic asset allocation and performance figures of the world's sec ond largest SWF: Norway's Government Pension Fund Global (former Government Petroleum Fund).

Funding scheme:

FINANSMARK-Finansmarkedet

Thematic Areas and Topics

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