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Comment by awinter-py | Hacker News Reader

The saudis are desperate to use their sovereign wealth fund to diversify (i.e. save) their economy.

The country has a lot of problems but I'm legitimately excited to see what they come up with. The first step to getting out of a hole is to recognize you're in one, and they have.

With any luck, economics-driven policy will lead to social change as well.

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> With any luck, economics-driven policy will lead to social change as well.

don't count on it. the regime isn't interested in social change. they're interested in retaining wealth and power for another 100 years and trying to adapt for the fact that their oil wealth only has another 30(ish) years left.

the priorities of the Saudi regime are very clear. they haven't been secretive. they promote Wahabism/Salafism and are waging a cold-war with Iran and every other Shia majority country in the world. They are religious fanatics driven by theological concerns.

Nah, they are pragmatic rulers who use religion and war (and religious war) as an extension of politics. Their legitimacy is entirely based on being the custodians of Mecca, so they make sure Mecca remains at the forefront of people's minds. The Wahabi royals are not unlike certain politicians who brand themselves "defenders of traditional family values" and then whip up hysteria about "war on Christmas": they manufacture conflict to strengthen their own legitimacy. Without conflict they become irrelevant, so they'll make sure conflicts never end.

It's such an old game, but it's incredible how well it still works all over the world.

</sarcasm>

They have $3.5B of it tied up with Uber at the moment. Not sure how prudent that was, and I don't mean the recent controversy. Just seems like a big bet on something that depends on future investments of the same magnitude to keep afloat until self-driving cars are really a thing.

Edit: Disagree? Please reply. This isn't a general Uber bash. It's known that they run at a very large quarterly losses (-$800M reported for Q3/16). Making a huge investment does come with the downside that you're the go-to when funds are running low. You have to keep buying in, or hope someone else does. If the idea is to diversify away from risk, it seems an odd choice. I'm open to learning why it was a good idea.

The idea is to diversify away from oil, not to diversify away from risk.

Well, I assumed diversify away from "high risk", given that oil is pretty "high risk" over the long term for them.

Not as big of a deal as you imagine. Diversifying now is the optimal scenario. Booms busts they'll be ok

These are seemingly non-correlated assets. Saudi Arabia is (apparently) minimizing their diversifiable risk, not minimizing their investment in risky sectors altogether.

Another point is $3.5b sounds like a big number but likely a rather small portion of the Saudi's sovereign wealth fund. Putting a low % of your portfolio into risky, but potentially highly valueable asset is generally seen as a reasonable thing to do.

I agree it's small in their terms, but as mentioned, the concern is that it's not small in terms of who Uber might go back to when they are running low. Sort of like a poker game where you have to keep buying in to keep the house afloat.

The problem is risk vs upside. If you make a 3.5 billion dollar bet for less than 100% and it became the largest company on eart that's not a huge ROI.

I'm not very optimistic about Uber, but where else can you potentially get a 10x return on a 10 digit investment?

Lot's of smaller but good investments vs a lower quality bad investment.

The best option for sovereign wealth funds is probably buying the widest possible swath of companies that reach some basic criteria. I suspect they do massive deals because internal politics means being in charge of such a deal let's you gain more power even if it costs the country on average because a huge win on a 3.5 billion investment means little at that scale.

Splitting up money into a bunch of smaller investments significantly decreases your chance of an outsized return and increases your chance for achieving the mean return for that asset class.

A sovereign wealth fund already faces this problem as 3.5 billion is peanuts (aka under 1%) to them. Now if they could get a 10x return in one year that would be something, but a tiny odds for a 10x return in a decade is not worth the significant risks involved in such a terrible investment.

You might be correct that Uber turns out to be a terrible investment. But there are a lot of smart people out there that disagree with you. And, unlike you, a lot of them have gotten to look at the details of Uber's financials.

I share your skepticism, but I'm not super confident in that belief.

If Uber can stay afloat until we have full adoption of self-driving cars, they will profit big-time. They will have a fleet of cars at almost no cost to them as car owners get in line to sign up to rent out their car during "off" periods.

That's the bit I wondered about. If they are losing 120 to 800 million per quarter, are there enough investors willing to wait through those losses for X years? I've heard wildly varying estimates for the value of X.

Another way of looking at this is they want to invest 0.5% of the worlds capital you can't get above 'market' rates for very long. And the longer you do, the harder this becomes. However, you can easily get below market rates.

Backing the top 10 VC funds as LPS -- then again they're probably already doing that.

Supposedly according to internal accounting the sovereign wealth fund is worth $2T as in Trillion. If they are able to capture and sell their oil reserves accordingly.

Wouldn't diversifying their economy would mean making major investments in local technology firms? This sounds less like trying to diversify their economy, and more about trying to secure a post-oil source of wealth for the ruling elite.

the ruling elite is their economy.

They don't care about the local economy though. Just wealth for the ruling class. They can buy slaves/workers when they need them, discard them when they don't, and soon enough they'll be able to just buy a robot army to keep it all together.

It's not clear to me how making investments in companies not based in Saudi Arabia help them diversify their economy. They need to be investing in building domestic companies not based on oil. This will require investments in infrastructure, education, health care, etc.

And, as you said, social liberalization as well.

When all your assets are tied to your currency and your currency tanks life gets hard. Having foreign assets you can divest and spend is useful, and is one of the things (along with oil transactions) that props up the US dollar's value. Because everyone ends up buying T bills as a simple way to hold assets denominated in dollars.

Japan in the 80's simply started buying up America (real estate, businesses) because of our recession, and a lot of people already worried about automobile manufacturing had a whole new set of worries. But then Japan had its own recession in the 90's and a lot of divestiture happened.

> It's not clear to me how making investments in companies not based in Saudi Arabia help them diversify their economy.

Maybe they're not trying to diversity the economy as much as the economic position of the royal family? Saudi Arabia isn't a democracy, and it still has an actual sovereign.

Norway's wealth fund invest primarily abroad as well for the simple reason that while it is important to diversify the local economy, pouring vast amounts of money into the local economy drives inflation.

The Saudi's are already pouring money into the local economy as well. But there's only so fast their economy can make efficient use of that money without overheating.

Investing abroad is a way of creating a lasting income stream without those problems.

This inflation argument sounds right to me.

Can you point to an article which talks more about how SWFs balance their in-country out-country investment?

I don't have any handy articles, I'm afraid. The Norwegian fund that generally gets discussed only invests out of country. There is another fund that invests in Norway (as well as a number of government development banks), but it is much smaller.

There are more details about both the global and domestic funds here [1], which does contain some bits on how it splits its investments and has a decent number of references.

[1] https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Nor...

Search for the term Dutch disease and you'll turn up a lot of papers on the topic.

Yeah, diversify their economy and expand their power, both military and soft power (terrorism) in order to maintain their grip on the peninsula as well as on global Islam.

> With any luck, economics-driven policy will lead to social change as well.

Don't count on it. All they seem to ever come up with is more modern ways to implement backwards laws.

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