HKMA's Exchange Fund cuts risk assets on record investment losses

The worst global investment environment in 50 years has left the Exchange Fund with 'nowhere to hedge'. HKMA's chief executive said the fund plans to adopt a defensive position heading into 2023.
HKMA's Exchange Fund cuts risk assets on record investment losses

Hong Kong Monetary Authority's (HKMA) Exchange Fund has been trimming risky assets and raising deposit levels in its investment portfolio even as it tallied up three consecutive quarters of losses.

The city’s de facto central bank said that the Exchange Fund - Hong Kong's de facto sovereign wealth fund - posted an investment loss of HK$100.1 billion ($12.8 billion) in the third quarter. 

It is the fund’s second-worst quarterly loss in the past 19 years according to publicly disclosed data. Its biggest loss was a record HK$112 billion in the first quarter of 2020.

Foreign exchange and Hong Kong equities were the worst performers of the September-ended quarter. All asset classes were in the red.

The fund's performance for the nine months ended September also showed an investment loss of 6%, or HK$265.5 billion ($34 billion).

Source: HKMA

“Looking into the fourth quarter, as the market recently rebounded on expectation of an interest rate hike slowdown in the US, the fund’s value has been repaired slightly, which we are hoping could help offset some of the losses throughout the year,” HKMA Chief Executive Eddie Yue told media after a Legislative Council financial affairs panel meeting on Wednesday (November 30).

“However, a full-year loss will still be inevitable,” he added, noting the investment environment in 2023 will "still be very difficult and challenging".

Yue said the Exchange Fund's investment strategies would remain conservative and that there would be no big changes to the bond and equity allocation. However, in the short term, the HKMA would play defensive and cut its risky assets, including stocks.


The Exchange Fund's assets under management totalled HK$3.92 trillion ($502.5 billion) at end of October, down by HK$656.9 billion from the end of 2021, HKMA announced on the same day.

The latest data available showed that the fund at the end of September has allocated more to deposits, while cutting positions in both debt securities and equities compared with the end of 2021. 

The allocation to debt securities was down to 70.3% by end-September from 72% by end-2021. 

The allocation to Hong Kong stocks slipped to 3.2% from 4% over the same period, while other equities position dropped to 10.9% from 12.3%, equivalent to a 2.2 percentage point change in total equity exposure.

Meanwhile, the share of deposits increased to 9.7% from 6.6% at the end of 2021. 

Source: HKMA


Yue noted that the first three quarters this year have seen the worst global investment environment in half a century, with both bonds and equities slumping drastically, making it a “nowhere to hedge” environment for the Exchange Fund.

“This has made it rather difficult to avoid investment losses,” he said.

Eddie Yue, HKMA

However, compared to the average 20% investment losses in the market for common investment portfolios, HKMA noted the fund’s 6% loss as of September was above average.

“As a fund to back Hong Kong’s financial system, the Exchange Fund has a unique investment strategy and target, which is to invest defensively and conservatively, making it gain or lose relatively smaller than the market average,” Yue said.

“HKMA will continue to strengthen the portfolio’s defensiveness,” he said. HKMA declined to comment on specific asset allocation changes this year and plans for the future.

ALSO READ: Market Views: Have Chinese equities reached the bottom and set for a comeback?

Source: HKMA


Despite the recent rebound in the market, Carlos Casanova, senior economist at Union Bancaire Privée believes 2022 could still turn out to be the worst-performing year for the Exchange Fund.

Carlos Casanova,

Although offshore Chinese equities have picked up recently, banking on China’s reopening will still require positioning for two-way volatility since the reopening process would be gradual and even painful, Casanova said.

“2023 looks set to be another volatile year, with risks including a potential recession in the US,” he said.

“The key remains managing downside risks to the portfolio without being excluded from potential upside rallies in equities in case we see a reopening in China or a faster inflection in Fed policy next year.”

In the bond market, Casanova thinks opportunities will be concentrated on higher quality issuers within investment grade globally, especially short-duration bonds.

“I think it's critical to potentially look at some tactical opportunities but remain cautious about the lower quality names, in line with a more defensive stance as risks continue to pile across different regions,” he told AsianInvestor.

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