Hong Kong Monetary Authority to boost long-term investments

The Exchange Fund, tasked with affecting the exchange value of the Hong Kong dollar in order to maintain monetary and financial system stability, ended 2016 with HK$3.63 trillion ($468 billion) in assets, up from HK$3.42 trillion the previous year. This included HK$61 billion in investment income.

Norman Chan, CEO of the HKMA, said in a statement that this return was achieved through three major defensive measures: reducing holdings of long-term bonds in favor of short-term bonds and cash; reducing holdings of non-US dollar and non-Hong Kong dollar assets; and expanding investments under the LTGP. The LTGP has generated an annualized IRR of 10.9% since its inception in 2009.

This strategy will continue in 2017, given uncertainty over the impact of policies pursued by the new US administration, elections in the Netherlands, France and Germany, the formal trigger of the Brexit process in the UK. Any of these could cause market turbulence, Chan said, while it also unclear how quickly the US will raise interest rates, which will affect fund flows, exchange rates, and asset markets.

“In the face of the continued complex and difficult investment environment, we will adopt a combination of both prudent and proactive strategies.  While continuing to implement defensive measures, we will expand investments under the LTGP with a view to minimizing the shocks brought by short-term market fluctuations and achieving better returns for the Exchange Fund in the medium to long term,” Chan added.

HKMA’s appetite for alternatives was clear in 2015 when the Exchange Fund made new or approved private equity and real estate commitments of $9.7 billion in 2015, double the previous year’s allocation. Of the HK$142.1 billion in the LGTP, the PE share was HK$91.3 billion, up from HK$80.5 billion in 2014, while real estate climbed to HK$50.8 billion from HK$34.7 billion. There was a further HK$122.4 billion in outstanding investment commitments, compared to HK$80.9 billion at the end of 2014.

The Exchange Fund recorded the second annual negative investment return in its 22-year history in 2015, with a loss of HK$15.8 billion, mainly due to a depreciation in non-Hong Kong dollar assets.

The LTGP cannot exceed one third of the accumulated surplus of the Exchange Fund. 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.

The more aggressive approach to alternatives comes as the HKMA was separately put in charge of Hong Kong's Future Fund, which invests 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, and more than half of it will be deployed in alternative assets over a three-year period.

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