HKMA Exchange Fund: How it selects external managers

Hong Kong's de facto central bank engages different external asset managers to help manage various asset classes from time to time. Here’s a look at how it selects external investment managers for its Exchange Fund.
HKMA Exchange Fund: How it selects external managers

The Hong Kong Monetary Authority’s HK$4 trillion ($512 billion) Exchange Fund is one of the biggest asset owners in the city.

The de facto central bank directly manages the majority of the Exchange Fund’s investments, and a portion of it is managed by external managers.

“The HKMA employs external fund managers to manage about 29% of the Exchange Fund’s assets, including all of its listed equity portfolios and other asset classes such as fixed income and derivatives,” an HKMA spokesperson told AsianInvestor.

“We do not fix the number of external managers employed and will increase or decrease the number of managers according to our investment needs.”

The spokesperson declined to comment on whether the fund plans to add more managers in 2023.


“We continue to engage different external asset managers to help manage various asset classes from time to time, with the aim of tapping the best investment expertise available in the market to realise sustainable returns; draw on diverse and complementary investment styles; and gain market insights and technical expertise in investment,” the spokesperson told AsianInvestor.

“There is a stringent process to select and appoint external fund managers, taking into account their integrity, financial strength, and investment performance,” the spokesperson said, adding that the general guidance in the document remains the same today.

“Performance of all the external fund managers of the Exchange Fund is reviewed and monitored closely under a set of established evaluation criteria, with robust processes including performance improvement plans and the right to terminate appointment in case of unsatisfactory performance,” the spokesperson said.


The fund’s investments are split between two portfolios: the backing portfolio and the investment portfolio.

The backing portfolio secures the monetary base, while the investment portfolio invests in bond and equity markets in both the developed and emerging markets. A portion of the investment portfolio is handed to external managers.

The appointment process for external managers is typically lengthy and can take months, according to investment experts. An external manager is put through at least three screening processes before appointment, according to the HKMA document.


The first screening identifies a list of candidates from the top performers in each type of mandate to whom requests for proposals (RFPs) are sent; and then scores each potential candidate on its short, medium, and long-term investment track record and the extent of its presence in Hong Kong.

“Different scores are assigned depending on whether the Hong Kong office is a marketing office or an investment office and whether its presence has increased or decreased in recent years,” the guidance document said.

“If the candidate does not already have a presence in Hong Kong, the intention to establish a presence also receives a score.”

The requirement of having a presence in Hong Kong is not unique; Singapore and Malaysia are other markets where government-linked investors encourage asset managers to have a physical presence in those markets as part of a broader development plan.

Paul Colwell

“It very much varies from entity to entity. From the point of selecting managers, it’s not necessary to have a local presence. However, many government-linked investors may request managers to have a presence because of the secondary objective to develop the local financial market,” Paul Colwell, head of the advisory portfolio group, Asia, at WTW, told AsianInvestor.

Asset managers in the same jurisdiction also offer regulatory coverage, he noted. “There might be a desire to have the jurisdiction of the investment remit in that location,” added Colwell.

Despite pandemic restrictions that put a damper on business activities until recently, Hong Kong remains an important financial hub in Asia. 

The asset and wealth management industry grew to $4.6 trillion at the end of 2021, according to the Securities and Futures Commission.

Close to 2,000 licensed entities carry out asset management activities and the industry employs close to 13,800 professionals. Several of the biggest names in the fund business including BlackRock, Invesco, Fidelity, and Amundi have a presence in the city.


The Exchange Fund’s RFP is an extensive questionnaire on the history and expertise of the institution; its investment philosophy and style; the stability of its investment professionals; its compliance record and quality of risk management; and its administration and infrastructure.

Staff of the HKMA’s Reserves Management Department visit the head offices and relevant investment offices of the short-listed candidates to assess the companies face-to-face.

Companies that score well on site visits are appointed when both parties agree to the investment guidelines, the fee structure, and the terms and conditions of appointment.

The HKMA declined to provide further details of its investment activities and strategies due to market sensitivities, only pointing out that it remains flexible in its investment strategies to manage the Exchange Fund.


Simon Coxeter

The fact that the manager selection process has been relatively stable since 2002 isn’t surprising, according to industry experts.


Most asset owners, especially government-linked investors, have manager selection processes that might not change for long periods of time.

"The overarching frameworks of performance review and manager selection may not have changed substantially [over the last two decades], but the related tools employed by asset owners, fund selectors and consultants have evolved," Simon Coxeter, head of Asia Pacific manager research at Mercer.

"Now, there’s greater use of technology, with more sophisticated tools available to assist in evaluating performance, portfolio construction and risk management, for example.

"We also see greater demand from asset owners for assistance in conducting robust evaluations of active managers, given the sizeable resources and breadth of expertise required to do this across a range of asset classes," Coxeter said.


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