What explains the rapid decline of sovereign-wealth funds?

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Remember sovereign-wealth funds? SWFs were the gigantic pools of capital amassed by governments that were export powerhouses (China, Singapore, Korea) or commodity exporters (Saudi Arabia, Kuwait, Persian Gulf sultanates, Russia) benefiting from the boom in global trade and spiking prices. In 2007, after a five-year global boom, they emerged as a suddenly massive asset class. Morgan Stanley analyst Stephen Jen, one of the first to latch on to their importance, notched their collective net worth at $2.3 trillion in March 2007 and at about $3 trillion later that year.

The global financial class viewed them with a mix of fear (Oh no! The Arabs and Chinese are going to buy all our strategically important companies!) and optimism (Holy cash cow! A new source of financing and clients for investment banks!). The fact that SWFs operated with all the transparency of a sheet of tin foil only enhanced their appeal and apparent power. In January 2008, SWFs were the talk of the World Economic Forum at Davos, Switzerland. After all, if the potent economic trends that had made them powers in the first place were to continue, SWFs would only get bigger. (This was another example of what I've dubbed "pro forma disease," the tendency to extrapolate a few years of impressive growth endlessly into the future: i.e., since housing prices doubled in the last five years, they'll do so in the next five.) In October 2007, the precise top of the global bull market, McKinsey & Co. issued a huge report about private-equity firms and sovereign-wealth funds fueled by petrodollars and Asian exporters. The New Power Brokers, as McKinsey dubbed them, had about $8.4 trillion in assets in 2006, a number that had tripled since 2000 and "which could double in five years." McKinsey estimated that oil-related SWFs alone had more than $2 trillion, with the Abu Dhabi Investment Authority alone playing with $875 billion. In no time, McKinsey suggested, the newly formed China Investment Corp would have $300 billion, Korea's SWF would have $100 billion, and Singapore's Government Investment Corp. $300 billion. According to this report from early 2008, Simon Johnson, then the chief economist at the International Monetary Fund, believed SWFs' assets would rise to $10 trillion by 2012, while Stephen Jen of Morgan Stanley believed they'd rise to $12 trillion by 2015.