The Hindu Business Line : Bye hedge funds, Welcome `sovereign wealth managers'

A new breed of money managers is in the making. They carry a fancy name - sovereign wealth managers. Hedge funds, which manage the money of the rich and super rich, will soon become passé. Such is the speed with which the notion and concept of managing sovereign wealth is catching up.

Private banking and wealth management have been around for quite some time. The Swiss were pioneers in these.

It all started not with capital growth — as wealth managers now offer — but capital protection from the prying eyes of the taxman and long arm of the law. The Swiss could guarantee utter secrecy and assure that no one could lay hands on customers' money, never mind its pedigree.

Swiss account

With increasing financial liberalisation spreading across the globe and governments allowing — even encouraging — their citizens to freely invest abroad, the numbered Swiss bank account has faded in importance (although no one can still better the Swiss courts and banks in their zeal for customer privacy). It was but a short step forward to create a new niche business and products exclusively for ultra-wealthy investors.

Banks rushed into the new opportunity and the Swiss, naturally enough, soon lost their monopoly as the custodian of private wealth. A plethora of banks — including many in India — have latched on to the bandwagon.

Till just the other day, few seriously thought the idea could be extended to managing a country's foreign exchange reserves. Singapore has been doing it for years, but it was always the exception.

China reserves

What has brought sovereign wealth managers to the forefront is China entrusting $3 billion of its reserves to the US private equity firm, Blackstone.

Clearly, the Chinese think they cannot do it themselves. $3 billion is just a sliver of that country's reserves of over $1 trillion, but the action could soon be followed by others with embarrassingly large dollar assets earning puny returns in US bonds and T-bills.

Predictably, the market is gaga over the possible large-scale entry of sovereign funds into stock markets and private equity. Projections of sovereign wealth under management run into trillions of dollars, dwarfing today's private equity and hedge funds.

India's role

It may not be long before India demands a piece of the action.

There are obviously major questions: how much must we invest and with whom? A first-time bad experience can put us off this exciting and essential diversification of reserves.

From a broader perspective, the prospect of reserve-rich countries looking beyond passive investment in US government paper has significant implications for US bonds and the dollar.

And who knows, this might just be the opportunity to recycle Asian surpluses at least partly within Asia itself — something talked about for long and often but never considered seriously — for the benefit of the poorer countries of the region.

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