HKMA enters alternative investments

The Hong Kong Monetary Authority reveals it has invested $2.2 billion in subsidiaries, both locally and overseas, in a new shift to diversify its $300 billion Exchange Fund portfolio.

The annual report of the Hong Kong Monetary Authority, released this week, shows the $300 billion institution has for the first time allocated money to alternative investments, including real estate, private equity and emerging-market equity and fixed income.

The HKMA Exchange Fund, responsible for the territory’s reserves, has made investments into four wholly owned subsidiaries that are investment holding companies.

These include Real Gate Investment Company, which holds two joint ventures incorporated outside of Hong Kong for holding overseas investment properties. Real Gate holds 51% and 74% of the equity interests in these two JVs, respectively.

HKMA’s share of these two joint ventures is HK$455 million ($58 million) in current assets and HK$7.9 billion ($1 billion) in non-current assets.

Real Gate was actually set up in 2009 but only revealed in the 2010 annual report.

The other three subsidiaries were set up last year. They are Eight Finance Investment Company, Drawbridge Investment and Debt Capital Solutions Company. They are managed internally by HKMA staff, according to someone familiar with the arrangement.

The annual report sheds no light on the specifics of these subsidiaries, but reportedly invest in private equity and emerging-market securities. However, together they returned HK$1.7 billion ($218 million) to the Exchange Fund in 2010.

HKMA’s 2010 balance sheet reports assets of investments to subsidiaries of HK$16.8 billion ($2.2 billion), up from HK$4.9 billion ($634 million) in 2009.

These measures are modest in terms of the overall size of the HKMA’s assets. But they represent innovations for the Authority, not only in its investment strategy, but its use of subsidiaries.

Until these four investment groups were set up, the HKMA had three subsidiaries, but none was for investments: they were to a company printing banknotes, a mortgage guarantee business, and the Hong Kong Mortgage Corporation.

Says the annual report: “In an effort to better manage risk and enhance long-term returns, the [Exchange] Fund has started, in a cautious and modest manner, to explore opportunities for diversification of investment.”

The Exchange Fund recorded an investment return of 3.6% in 2010. This compares to a three-year average annualised return of 1.2%. Its objective is to maintain the exchange value of the Hong Kong dollar, by preserving capital, ensuring the monetary base is always backed by highly liquid US dollar-denominated securities, ensuring liquidity for financial stability, and achieving a return on investment.

The target bond-to-equity ratio of the benchmark is 75:25, with 82% allocated to US and Hong Kong dollars, and the remaining 18% to other currencies. That is the benchmark; as of December 31, the actual currency mix was HK$1.85 trillion ($237 billion), or 79%, to the US dollar; HK$217 billion, or 9.3%, to the Hong Kong dollar; and HK$275 billion, or 11.7%, to other currencies, including euro, yen, sterling, Australian dollar, Canadian dollar, Singapore dollar, Swiss franc, Swedish krona, Norwegian krone and Danish krone.

The Exchange Fund is managed as two distinct portfolios, including an investment portfolio that invests in OECD securities. Together these recorded an investment income of HK$79.4 billion in 2010, comprising gains of Hong Kong and foreign equities of HK$11.6 billion and HK$27.1 billion, respectively; valuation gains from bonds and other investments held by the investment holding subsidiaries of HK$42.1 billion and HK$1.7 billion, respectively, and a loss of HK$3.1 billion from currency.

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