Hong Kong Monetary Authority doubles alternatives commitments in 2015

The territory's reserves are held in the HK$3.42 trillion ($441 billion) Exchange Fund, which is tasked with affecting the exchange value of the Hong Kong dollar in order to maintain monetary and financial system stability. Investments in illiquid alternatives are made from the long-term growth portfolio (LTGP), which was worth HK$142.1 billion at the end of 2015, up from HK$115.2 billion 12 months earlier.

The private equity share of the portfolio jumped to HK$91.3 billion from HK$80.5 billion, while real estate climbed to HK$50.8 billion from HK$34.7 billion, the HKMA said in its annual report. There was a further HK$122.4 billion in outstanding investment commitments, compared to HK$80.9 billion at the end of 2014.

The LTGP, which cannot exceed one third of the accumulated surplus of the Exchange Fund, has recorded an annualized IRR of 12% since its inception in 2009. The bulk of the Exchange Fund remains concentrated on the backing portfolio comprising US dollar-denominated assets and an investment portfolio that targets liquid, low-risk and short-term assets such as bonds and equities. However, the LTGP is becoming more significant as the HKMA looks to diversify its holdings.

"In anticipation of a worsening investment environment, the HKMA has deployed a series of defensive moves over the past years, which include shortening the duration of bond portfolios, increasing cash holdings, and significantly reducing non-US dollar assets. We have also quickened the pace of diversification, especially through investments under the LTGP. These moves have enhanced the resilience of the Exchange Fund and helped mitigate some potential losses," the annual report said.

The Exchange Fund recorded an investment loss of HK$15.8 billion in 2015 as gains of HK$7.1 billion on overseas equities and HK$11.1 billion on other investments were cancelled out by a HK$5 billion loss on bonds and a negative currency translation effect of HK$44.9 billion on non-Hong Kong dollar assets.

The overall investment return of -0.6% represents the second time in its 22-year history that the Exchange Fund has posted an annual loss. The average return has been 1.8% and 3.3% over the past five and 10 years, respectively, and 5% since inception.

The more aggressive approach to alternatives comes as the HKMA was separately put in charge of Hong Kong's new Future Fund, a vehicle intended invest budget surpluses to cover future liabilities arising from an ageing population and slower economic growth. The Future Fund has initial capital HK$219.7 billion drawn from the territory's fiscal reserves, and more than half of it will be deployed in alternative assets, mainly global private equity and overseas real estate, over a three-year period.

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• Topics
• Greater China
• LPs
• Performance
• Hong Kong (China)
• Hong Kong Monetary Authority (HKMA)