The more recent surge in oil prices has naturally spurred the set-up of new funds in countries where new extraction capacities have emerged as profitable. Non-commodity funds Non-commodity SWFs are mainly born out of foreign exchange interventions, and can be regarded as “spillovers” from international reserves that can no longer be properly managed within the standard framework of official reserve assets. One of the questions to be discussed is whether they correspond to the same rationale as commodity funds, and to what extent they can be considered to have the same sound basis. Comments FX reserves are typically invested in safe and liquid assets such as T-bills, T-bonds or shortterm collateralised deposits. The emphasis on liquidity risk control in the prudent management of reserves logically results from their possible use in foreign exchange interventions. But SWFs are clearly designed to invest in less-liquid and riskier assets that provide higher returns than the typical assets held in official reserves. Whereas the objective of reasonable returns was typically mentioned last, as “subject to liquidity and other risk constraints”, in the IMF Guidelines on reserve management, excess returns clearly feature as a primary  BIS Review 119/2007  5  objective of SWFs. A central reason for this reordering of objectives is of course the much longer-term horizon of these funds, which entails greater tolerance of short-term fluctuations in returns.
Of course, one could argue that central banks are doing their job in taking over foreign exchange positions: naturally, holding foreign assets would expose private agents to currency risk exposure, and in that respect the public holding of foreign assets may be seen as relieving domestic agents from that risk. However, this reasoning raises two objections: -  as taxpayers, domestic private agents are still indirectly exposed to the realisation of the large currency risk that public managers of foreign assets bear, which entails fiscal costs;  -  if the capital account regime had not resulted in the public sector management of these savings in the form of foreign assets, in principle, corporates (and possibly households) would have directly invested their savings in financial instruments of their choice abroad. More realistically, they would probably have unwound their currency exposures and saved in domestic assets. In the absence of official intervention, the exchange rate would have adjusted. However, the fact remains that foreign reserve holdings belong to the nation that has accumulated these assets, hence indirectly to private domestic agents (admittedly including future generations). The public intermediation of these savings naturally leads us to the question of the appropriate manner in which to manage such large holdings. The management of international reserves The facts High current account surpluses mechanically reflect an excess of domestic (private or public) savings, which must be invested abroad. But in East Asia and commodity-exporting countries, these accumulated excess savings appear to be largely held by sovereigns.