Sovereign wealth funds, a $3 trillion industry managing windfall revenues for future generations, arguably need a set of benchmarks different from those used by other private investors as they are state-owned. Andrew Ang, an associate at U.S. National Bureau of Economics and a professor at Columbia Business School, proposes the following four benchmarks in a recent paper distributed to SWFs.

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The Benchmark of Legitimacy. Whatever the source of wealth, the SWF exists to transfer the benefits of that wealth from the present to the future. Without this benchmark, the money in the SWF is at risk of being immediately depleted. A necessary condition to maintain legitimacy is to have well-developed legal institutions in place.

The Benchmark of Integrated Policy and Liabilities. A critical part of this benchmark is detailing how and under what conditions the money can be distributed from the fund. Clear, yet flexible, spending rules must be set to meet well-defined liabilities.

Governance Structure and Performance Benchmark. There is no single optimal governance structure or performance benchmark, but creating a culture of professionalism and market discipline ie key. For many SWFs, the ideal mandate is a real return target plus some spread.

Long-Run Equilibrium Benchmark. Their long-term horizon may require SWFs to pay attention to issues that are not on other investors’ immediate investment strategy, such as climate change, child labour, or water management. In fact they may be in a unique position to profit from the market’s mispricing of these externalities.