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Deutsche Bank review: Government investment funds growing

Government investment funds around the world have twice the assets of the hedge fund industry and may grow from $3.2 trillion today to $5 trillion by 2012 and $10 trillion by 2017, says Deutsche Bank in a review published yesterday.

Sovereign funds are becoming the largest players on world financial markets, which explains the political opposition to their activities in the United States, European Union and other countries. In Russia, the US, China, EU and other countries, legislation has been passed or is being considered to impose various restrictions on corporations controlled by foreign states investing in strategic sectors of the economy.

The majority of sovereign funds are in developing countries. They constitute about 7% of the capitalization of the world financial market and about 5% of the assets of the world banking system. The largest sovereign fund is that of Abu Dhabi. The Abu Dhabi Investment Authority is estimated by Deutsche Bank to be worth about $875 billion. It has been one of the first funds to run into regulatory problems in the West, when it was prevented from purchasing six American ports and a blocking package in the Scandinavian stock market.

The expansion of sovereign funds is unavoidable. After the Asian financial crisis of 1997, developing countries have been more cautious in their financial policies. As a result, currency reserves (without accounting for gold) have grown to over $4.2 trillion worldwide. China has gold and currency reserves of $1.4 trillion. The island nation of Kiribati has accumulated funds since 1956 amounting to more than nine times the country’s GDP ($600 million) and receives investment income equivalent to 33% of its GDP. The Russian stabilization fund earns an income of 9% annually, which considerably exceeds the income from the gold and currency reserves (3-4%). (