Front Running Overly Transparent SWFs?

Ashby Monk

The inaugural meeting of the International Forum of Sovereign Wealth Funds (IFSWF) wrapped up on Friday. The two day meeting ended in an agreement to further promote compliance with the Santiago Principles as well as work to prevent protectionism. This is pretty much what we expected to come out of the final communique. However, I was interested to see two SWF complaints surface in interviews with the IFSWF leadership after the meeting:

The first had to do with reporting. It seems there was agreement that quarterly reporting drives SWFs’ asset managers towards short-termism, which contradicts SWFs’ nature as long-term investors: “This kind of practice encourages the management to seek short term, high profit, to the detriment of long term returns. We don’t want to do that,” according to Jin Liquin, Chairman of the Board of Supervisors at CIC and Deputy Chair of the IFSWF. I would be more sympathetic to this complaint if it was based on experience. As far as I know, the CIC does not and has not reported quarterly, so any complaints being voiced are purely theoretical. Moreover, the fact that SWFs have no outside shareholders (beyond the government) and are not traded entities implies that quarterly reporting should have little impact on SWF operations. Ostensibly, the political elite who are responsible for the funds have bought into the mandate and are in fact being kept up to date on operations. So this is really a complaint about keeping the countries’ citizens informed as to what the SWFs are up to, which seems off to me. But this is an increasingly common refrain these days, as the formerly secretive SWFs begin to understand how difficult it can be to acheive domestic legitimacy.

The second complaint was also about transparency. According to David Murray, Chair of the IFSWF, front running has become a real problem for SWFs: “Because we are generally large institutional investors, there is the whole community of investment banks, brokers, analysts and others who want to front-run our investments in the market.” In short, he worries that becoming overly transparent will allow these other investors to jump into certain investments before the SWFs, which will in turn erode returns. Since most SWFs are secretive, I didn’t think this was a problem. That said, I acknowledge that the greater transparency associated with the Santiago Principles may allow other investors to guess what the big SWFs are interested in. But this, too, seems a bit of a stretch. Large investors of all kinds deal with similar issues, and there are many ways to keep this type of information secret all the while reporting on operations regularly. Backing away from reporting due to the threat of front running would be, in my opinion, misguided.

Anyway, the first IFSWF meeting was interesting! The next meeting will be in May 2010 in Sydney.

5 Responses to “Front Running Overly Transparent SWFs?”


  1. 1 rien huizer November 4, 2009 at 2:21 am

    I thought front running would no be a problem with most SWFs outside the OECD area, since the practice is usually less effectively counteracted by the local authorities. Is the problem perhaps that outsiders are not expected to benefit from front running opportunities?


  1. 1 Sovereign Wealth Funds Times » Wednesday, 14 October, 2009 Trackback on October 14, 2009 at 1:53 pm
  2. 2 GAPP Non-Compliance « Oxford SWF Project Trackback on October 14, 2009 at 2:32 pm
  3. 3 Front Runners Busted « Oxford SWF Project Trackback on November 23, 2009 at 4:17 pm
  4. 4 An Update On China’s SWFs « Oxford SWF Project Trackback on February 22, 2010 at 2:48 pm

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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