By William Pesek

Singapore is not happy. This, of course, may be a vast understatement as the city-state's sovereign wealth fund assesses the fallout from a $2.3 billion unauthorized trading loss at UBS AG.

The Government of Singapore Investment Corp. is UBS's biggest investor. The hit Singapore may take in the short term is another sobering blow for the state wealth funds that were supposed to alter the face of capitalism forever.

By fluke of timing, UBS Chief Executive Officer Oswald Gruebel is in Singapore this week for client events coinciding with the city's Formula One Grand Prix. After seeing him, Singapore wealth fund officials said they had “expressed disappointment and concern about the lapses and urged UBS to take firm action to restore confidence in the bank.”

Yet this story is as much about the risks facing sovereign wealth fund managers as it is about UBS.

In the days before the global financial crisis, back when Lehman Brothers was too big to fail, Iceland was a country (not a failed hedge fund), and American-style capitalism still held sway, wealth funds were heralded as saviors of world markets. The trillions of dollars that resource- and cash-rich governments were pouring into markets would create unlimited demand for bonds, stocks, commodities and companies. Markets had a new shock absorber, and it appeared to work brilliantly.

Then the roof fell in. China Investment Corp. suddenly had some explaining to do for the $3 billion investment it made in Blackstone Group LP in 2007. Abu Dhabi Investment Authority faced questions over its support of Citigroup Inc. In Singapore, Temasek Holdings Pte, a state-owned investment company, sold its shares in Bank of America Corp. -- BofA bought Merrill Lynch, in which Temasek had originally invested -- for an estimated $4.6 billion loss in early 2009.

Now Singapore's sovereign wealth fund may be regretting the roughly 6.4 percent in UBS it grabbed in 2008. It's a reminder of the risks inherent in today's chaotic markets. It's also a sign that even the big, big money should expect to take its share of lumps in the months -- and years -- ahead.

(William Pesek is a Bloomberg View columnist.)

-0- Sep/21/2011 16:35 GMT