THEY are a new breed of marauding investor – secretive investment firms with a voracious appetite for deals and the fire-power to send shockwaves through the world’s financial markets.

Welcome to the often murky world of sovereign-wealth funds, government-sponsored investment firms flush with cash creamed off from huge Asian trade surpluses, financed by Middle Eastern and Russian petrodollars or huge state pension schemes.

These new barbarians at the gate have enormous assets. According to Morgan Stanley, sovereign-wealth funds currently manage about $2,600 billion (£1,300 billion) – eclipsing the $1,700 billion run by hedge funds. A further $4,400 billion is held in sovereign pension funds, which are likely to be managed by sovereign-wealth funds in the coming years.

Growth has been rapid but is set to rocket. By 2011, Morgan Stanley estimates the funds will be larger than the combined official reserves held by the world’s governments. In 15 years, sovereign-wealth funds could reach $27,000 billion, giving the funds control of 9.2% of total global financial assets, up from 2.6% today.

What makes this such an important trend is not just the enormous sums involved, but the aggressive desire of these state-sponsored vehicles to take stakes in companies in the developed world or even take them over.

“The emergence of sovereign-wealth funds will be one of the key trends for the financial markets in the coming years. If they are managed well, these funds are going to have a pretty serious impact on global financial prices and markets,” said Stephen Jen, head of global currency research at Morgan Stanley.

Sovereign-wealth funds are not new. The Kuwait Investment Authority was set up in 1960 to manage the emirate’s wealth from oil revenues. Singapore’s Temasek, brain-child of the state’s first leader Lee Kuan Yew, was launched in 1974; Abu Dhabi’s Adia, the largest sovereign-wealth fund at $875 billion, dates from 1976.

But a number of trends are prompting concern among governments in Europe and America, and stirring up protectionist sentiments. For a start, new funds are being set up. China is creating a $300 billion fund that some believe could grow by a mind-boggling $250 billion to $300 billion a year.

Early next year, Russia, which already has a $24 billion vehicle, plans a $30 billion Future Generations fund, which many expect to grow by $40 billion a year. Japan is considering diverting $700 billion from its vast foreign reserves to set up a sovereign-wealth fund investing in overseas assets.

In a bid to boost returns, the funds’ investments are being switched from low-yielding assets such as US treasury bonds to equity stakes and even outright takeovers. The targets: companies in America and western Europe, particularly in “strategic” areas such as technology, transport, oil, commodities and financial services.

No wonder governments are worried. “These funds are going to have the ability to buy any global company, to create panic in markets if they move too precipitously, even to dwarf the political clout of international financial institutions. They can no longer be ignored,” wrote Jeffrey Garten, professor of Yale School of Management.

Many predict government bond prices will fall and yields rise as sovereign-wealth funds move their assets elsewhere.

“The idea of private, state-run funds buying public companies in developed countries can create fear – partly because the threat is from China. It is a fear of the unfamiliar,” said one investment analyst.

Protectionism spilled over last year when pressure from Congress forced Dubai Ports World, owned by the emirate, to sell off five American port terminals acquired as part of its takeover of P&O. A year before, Chinese state oil company CNOOC scrapped a $18.5 billion bid for the American energy group Unocal after politicians portrayed it as a front for China’s energy interests.

China stunned financial markets by paying $3 billion for a 9.9% stake in the float of private-equity giant Blackstone, though it was forced to appease critics by giving up voting rights.

Vehicles controlled by Dubai’s ruling family have made a series of investments. These have ranged from trophy assets such as Tussauds Group, owner of the Madame Tussauds waxworks, bought for £800m in 2005 before 80% was sold to Blackstone for £1 billion a year later, to stakes in HSBC and Deutsche Bank.

Others have been strategic, including the £700m takeover of the British engineering group Doncasters, which required American approval because the company makes parts for fighter jets, and a 3.1% stake in Airbus parent EADS. Gulf states are also battling for control of Europe’s stock exchanges. Borse Dubai is competing with Nasdaq to buy Scandinavia’s OMX, while the Qatar Investment Authority and Temasek are vying to buy Nasdaq’s 31% stake in the London Stock Exchange.

Critics argue that sovereign-wealth funds lack transparency and are politically motivated. Others are alarmed at how state-owned firms could be used alongside the funds to grab strategic assets. The Kremlin has been accused of using the gas giant Gazprom as a tool for its foreign policy.

Not all funds are secretive. Norway’s $320 billion Government Pension Fund, set up in 1990, is a model of openness and in a bid to not distort markets takes an average stake of less than 1% in a company.

Garten argues that funds should be forced to publish audit reports twice a year and be limited to owning 20% of companies in America and Europe unless they gain government approval. The International Monetary Fund is looking at guidelines on how to deal with sovereign-wealth funds, and German chancellor Angela Merkel is considering new laws to make it harder for funds to take over German companies.

Some funds are trying to face down the protectionist fears. Simon Israel, executive director of Temasek, which owns 16% of Standard Chartered and a stake in Bar-clays, has been on a charm offensive. Israel is at pains to point out the Singaporean fund is different because it is not “state-directed” and its corporate-governance standards mirror those of a listed company.

Critics say this stretches a point since five of the Temasek board are former or current members of the state apparatus and the chief executive, Ho Ching, is the wife of the prime minister.

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