The new power brokers: the big four who run the new global economy.

• Author: Farrell, Diana

The speed and complexity of today's global financial markets can be unnerving for onlookers. Middle East investors are vying for stakes in NASDAQ and the London Stock Exchange. Rumors of a shift in China's appetite for U.S. Treasuries send shivers through U.S. credit markets. Massive hedge fund selling shakes equity markets. And much of the unease arises from the public's lack of information about four increasingly influential, but traditionally secretive, groups of players--investors from oil-exporting nations, Asian central banks, hedge funds, and private equity firms.

A new report by the McKinsey Global Institute calls these four players the new "power brokers" because of their growing size and ability to shape global financial markets. The research shows that the combined assets of these players have tripled since 2000 to around $8.5 trillion at the end of 2006. That is equivalent to 40 percent of the size of global pension funds--impressive for players that were on the fringes of financial markets just five years ago.

Given the sheer size of these new powers, the concerns about them are hardly surprising. Increasingly large investments by quasi-governmental investors from the Middle East, Russia, and Asia are stirring nervousness about potential threats to national security in the United States and Europe. The rush of cash emanating from these players could be fueling asset-price bubbles. Heavily leveraged private equity and hedge funds could create new sources of financial market instability. And because all these players are lightly regulated, they can move huge amounts of money beyond the scrutiny of financial market authorities.

Such concerns are genuine and may be justified. But the first step toward accurately assessing the risks is laying out the facts. Even if you assume big is bad (and we don't), the criticisms are not always well targeted. Private equity funds, perhaps the most scrutinized of the four power brokers, are also by far the smallest. Like hedge funds they have expanded rapidly due to growing investor demand and low interest rates. Engineers of "leveraged buy-outs"--or LBOs in the 1980s--private equity funds have tripled in size since 2000 and have $710 billion in investors' capital (as of the end of 2006). But hedge funds are at least twice as large, holding assets of $1.5 trillion. If you count leverage--borrowed money hedge funds often use to boost returns--they may control as much as $6 trillion invested in financial markets. That would make hedge funds the largest of the power brokers, bigger even than the oil states.

Next in size are the Asian central banks, with foreign reserve assets of $3.1 trillion--the results of soaring trade surpluses, significant foreign investment in the region, and exchange rate policies. Finally, in terms of dollars in hand, the tripling of world oil prices since 2002 has made petrodollar investors the largest of the four new power brokers. McKinsey Global Institute estimates that oil investors have between $3.4 trillion and $3.8 trillion in foreign financial assets.

The simultaneous rise of these players is not a coincidence. In many ways, their growth has been--and will continue to be--mutually reinforcing. Oil-rich countries and Asian central banks together are the largest net capital exporters to the word, accounting for over half of global net capital outflows. The liquidity these players pump into global markets has lowered global interest rates...