A Note on Portfolio Choice For Sovereign Wealth Funds

The vast current account surpluses of commodity-rich nations, combined with record current account deficits in developed markets (US, Britain), have created a new type of investor.

Author(s):

Bernhard Scherer

Professor of Finance, EDHEC Business School

Sovereign wealth funds (SWFs) are instrumental in deciding how these surpluses will be invested. We need to better understand their investment problem in order to project future investment flows. Extending Gintschel and Scherer (2004, 2008), we apply the portfolio choice problem for a sovereign wealth fund in a Campbell and Viceira (2002) strategic asset allocation framework. Changing the analysis from a one- to a multi-period framework allows us to establish three-fund separation. We split the optimal portfolio for an SWF into speculative demand as well as hedge demand against oil price shocks and shocks to the short-term risk-free rate. In addition, all terms now depend on the investor's time horizon. We will show that oil-rich countries should hold bonds and that the optimal investment policy for an SWF as a long-term investor is determined by long-term covariance matrices that differ from the correlation inputs that one-period (myopic) investors use.

Type: Working paper
Date: le 03/11/2009
Research Cluster : Finance

See Also

AGORA MEETS BERTRAND BADIE, POLITICAL SCIENTIST AND INTERNATIONAL RELATIONS SPECIALIST
News
- 21-10-2021
Agora students held another 'Rencontre de l'Agora' event on Wednesday 19 October, this...
Eiffel Excellence Scholarship: the most prestigious French scholarship you can get
News
- 21-10-2021
Mikhail Miroshnichenko joined EDHEC MiM Finance after his Bachelor’s degree in...
EDHEC-Auchan Learning Partnership: Retail industry transformations at the heart of EDHEC International BBA learning
News
- 20-10-2021
Auchan is joining forces with EDHEC to share its retail industry expertise with EDHEC...
The FIR-PRI Awards “Finance & Sustainability” prize for “best pedagogical innovation”: preparing future generations to fight climate change.
News
- 18-10-2021
At EDHEC, we want to take part in the fight against climate change. Through our...