The Trump administration’s sudden push to create a U.S. sovereign wealth fund has raised more questions than answers, including critical choices about how such a fund would be created and how it could work. How those questions are answered could set up bitter economic and political clashes in Washington and on Wall Street.
Trump announced Monday in an
Sovereign wealth funds are usually investment vehicles for countries to invest national surpluses abroad — typically balance of payment surpluses or budget surpluses — as a way of saving state wealth for future generations.
The funds have been around for some time. The oldest SWF — the Kuwait Investment Authority — was established in the 1950s. Countries that have established sovereign wealth funds tend to be those with substantial surpluses from commodity sales — Norway, for one, leverages its vast oil and gas reserves for its sovereign wealth fund — and they serve to smooth out swings in commodity prices and ensure long-term financial growth. Globally, more than 90 SWFs manage over $8 trillion in assets, with the majority funded by revenue from natural resources.
But the vision President Trump laid out for the U.S. nascent sovereign wealth fund seems different, most prominently because the US has a significant budget deficit. Trump’s executive order suggests the fund might be kickstarted with existing government assets, but critics warn this strategy has legal hurdles and could cause market distortions. Similarly, the administration has suggested the fund could be used for strategic investments, such as acquiring TikTok or funding infrastructure, but that raises significant ethical issues around the fund’s governance and management.
Adnan Mazarei, who helped develop a set of best practices for sovereign wealth funds around the world known as the
“They could also theoretically do investments in areas where they think the U.S. economy needs it — it could be infrastructure, it could be energy, it could be in the form of private-public partnerships,” Mazarei said. “It is still not totally clear to me.”
Banks could play a partnering role in the activities of a SWF, including by providing capital or by assisting in transactions, he says.
“If the government has to borrow money to fund this, a good part could come from banks or other financial institutions,” Mazarei said. “I could see some investment by some banks being partners in investments with the U.S., if this sovereign wealth fund gets used for investments abroad.”
Clay Lowery, a former Treasury Department Assistant Secretary for International Affairs and Vice President for Research and Policy at the Institute of International Finance, said a U.S. sovereign wealth fund’s relationship with banks could be complicated since a sovereign wealth fund would act as a government entity that actively participates in capital markets.
While U.S. agencies do this to some degree already — the Federal Reserve has bought reams of mortgage-backed securities and other assets after the 2008 financial crisis and the 2020 pandemic — a federal entity buying stakes in private businesses like TikTok could blur the lines between private and public ownership.
“So which is it?” Lowery asked. “And then does it crowd out private sector investing or private sector lending? I think that if you’re a bank right now, you’re probably just saying, ‘How do you finance it, what is it going to be investing in? And then … we’ll see whether or not it plays a crowding out effect.'”
Lowery says Banks could see opportunities in providing assistance to transactions made by a government investment fund.
“Who’s doing the investment banking aspect of that, who’s doing the underwriting and so forth?” he said. “You can see banks getting involved in that.”
Not a new idea
Trump has been toying with the idea of a sovereign wealth fund for some time, and prior administrations have considered the idea as well. In September of 2024, the then-candidate called for the creation of a government fund to invest in national development projects. Top Biden administration officials also reportedly explored plans for a fund that would invest in fortifying global supply chains and sustainable energy projects.
In September 2024, Rep. Morgan McGarvey, D-Ky., introduced the American Sovereign Wealth Fund Exploration Act to explore the creation of a U.S. sovereign wealth fund.
Congress also launched an investigation of other countries’ sovereign wealth funds before the global financial crisis over fears that foreign governments — particularly adversaries like China — might use them to pursue political interests rather than economic ones. Those concerns were heightened when a company linked to the United Arab Emirates’ sovereign wealth fund
Those concerns resulted in a joint effort between the International Monetary Fund and the International Working Group of Sovereign Wealth Funds — a collaboration between 14 of the most important funds around the world — to create the Santiago Principles, a set of international standards aiming to promote transparency, ethical governance and protect sovereign wealth funds from political pressure.
“These were a set of principles as to how to structure the sovereign wealth fund, how to manage it, how to create transparency and how to make sure the sovereign wealth fund is accountable to the people who own it,” Mazarei said. “Theoretically, [that is] the population of the country.”
During the global financial crisis, Mazarei said, the concerns around SWFs diminished slightly because of the need for foreign investment and foreign funds’ willingness to buy struggling U.S. bank shares, a benefit to the U.S. economy when other investors were retreating.
But Mazarei says one critical question that the Trump administration has not answered is what problem the creation of a sovereign wealth fund would solve. Unlike the UK’s recently launched fund, for example, the Trump administration has not provided details about what the fund would invest in specifically.
“The purpose of [the UK’s fund] is in good part for climate change,” he said. “So there’s a very concrete purpose — you feel like the private sector is not going to do it, the social rate of return will be higher than the private rate of return — so a case could be made.”
Show me the money
Arguably the biggest question surrounding a U.S. sovereign wealth fund is its funding source. While the U.S. collects revenue through taxes and tariffs, it lacks the budget surplus that capitalizes most sovereign wealth funds, and instead has a considerable operating deficit.
The executive order attempts to address this concern by saying the U.S. “holds a vast sum of highly valued assets that can be invested through a sovereign wealth fund for greater long-term wealth generation.”
Mazarei says that selling off Treasury assets, while not impossible, will involve tough trade-offs. Treasuries bills, for example, are some of the most vital stores of wealth in the world, with banks and governments using them to leverage borrowing or to save for emergencies. A government-sponsored sale of the scale necessary to create a fund would need to be carefully considered and negotiated.
“One needs to make an argument why I’m selling this [asset] with such a rate of return and try to invest in another business,” he said. “Shifting assets is not going to be easy…it’s doable, of course, any reasonable government reviews its assets and liabilities and shifts some around, but it’s not clear what the new administration has in mind in this area.”
Lowery is equally uncertain about where the funding might come from, given the state of the U.S. budget.
“Clearly, we don’t run current account surpluses, we run big current account deficits, as Donald Trump points out all the time,” he said. “We’re a bit of an exporter now on energy markets, — except for it’s all done through private investors, it’s not captured by the government — so I don’t really know how you’re going to finance it.”
Jaret Seiberg, an analyst at TD Cowen, says the funding issue could be a major roadblock, even risking harm to U.S. credit quality.
“We do not see how Treasury can fund a sovereign wealth fund while Treasury is using extraordinary measures to prevent the United States from defaulting on the debt,” he wrote in a research note. “This is because Treasury is tapping all available pools of cash to ensure the United States can pay its bills. Diverting funds from this to a sovereign wealth fund could bring forward the so-called X date when the U.S. technically defaults on the debt.”
Control and governance
Even if the funding is gathered, standards around who controls the fund’s investments present major concerns for experts like Mazarei. The Santiago principles he helped draft were established to mitigate the influence politically-motivated actors could wield over government-sponsored funds.
Trump has reportedly tapped Commerce Secretary-designate Howard Lutnik and Treasury Secretary Scott Bessent to oversee the venture. However, Mazarei warns that placing political appointees in charge of a government investment fund could conflict with the principle that sovereign wealth funds should remain accountable to the public.
“To whom is it going to be accountable to? The executive branch?” he said. “The best practice would be — just like the executive branch and its spending are accountable to the representatives of the people — it should be the representatives of the people who have a say in what the government’s assets and liabilities are.”
That question of governance and accountability is heightened by the unusual relationship the Trump administration has entered into with billionaire founder and head of the newly-created Department of Government Efficiency Elon Musk. Musk recently
In January,
Mazarei is concerned that without strong safeguards, economically interested parties could attempt to steer a SWF to their own ends.
“The problem is, if there isn’t such transparency and accountability, there is a good chance that these investment decisions will be made by people who have strong economic interests, who may be in or out of the government,” he said. “I am doubtful about the purpose of this, I am quite doubtful about the financing of it and I am more than worried about the governance and the potential misuse of this.”
Seiberg similarly says the fund could be driven more by politics than maximizing returns on public funds. What’s more, he says lawmakers may object to allocating funds to an investment fund rather than paying down U.S. debt.
“We worry this could be used to make politically motivated investments as we do not see either political party turning the fund over to independent managers,” he wrote. “That could result in the fund being a drag on the economy rather than a boost.”
Lowery says part of the reason for the international standards for SWFs was to police governance of these funds.
“The idea of the principles was: ‘show your books, be transparent, have good governance’ — governance meaning you would have people who know how to invest would be in charge, and they would be running it,” he said. “And that doesn’t mean you can’t create a governing board, and the governing board, by definition, would probably be made up of political actors.”
‘Long way to go’
There is also the considerable question of whether Trump will attempt to create the fund through executive order alone — a legally dubious prospect — or pursue a legislative path, which would provide a firmer legal footing but would also require more time and expend limited political capital.
“President Trump — probably and President Biden too — think you can do a lot of things through executive order,” he said. “This one does strike me as one in which you’re going to have to figure out how you get authority from Congress in some sort of an appropriation … so I think they have a long way to go to try to cook this thing.”
Seiberg says for a fund to be feasible, it would likely need a dedicated funding source, like fees the government collects for say, oil and gas leases. Without that, the legality of each investment could be questioned.
“Treasury might also try to find a way to use the proceeds from selling its stakes in Fannie Mae and Freddie Mac as a way to generate funding,” he wrote. “We see funding as most stable if Congress authorizes it, otherwise, there could be legal action to block the investments.”
