Volatility Hits Hong Kong Exchange Fund with $3.25 billion investment losses in the second quarter; De facto central bank sees “immense shocks” ahead

July 28, 2013 Leave a comment

July 26, 2013, 8:40 a.m. ET

Volatility Hits Hong Kong Exchange Fund

De facto central bank sees “immense shocks” ahead

CHESTER YUNG

HONG KONG—Hong Kong’s de facto central bank suffered an investment loss of 25.2 billion Hong Kong dollars (US$3.25 billion) in the second quarter, due to declines in the value of its bond holdings and foreign-exchange losses during a period of heightened market volatility. The Hong Kong Monetary Authority’s Exchange Fund lost 19.6 billion Hong Kong dollars on its bond holdings during the quarter, reversing a gain of 2.8 billion Hong Kong dollars in the first quarter. It also lost 6.1 billion Hong Kong dollars on local equities as the benchmark Hang Seng Index fell 6.7%, while losses from foreign-exchange movements totaled 5.9 billion Hong Kong dollars. The HKMA uses the fund to manage its assets and maintain the Hong Kong dollar’s peg to the U.S. dollar, as well as to ensure the territory’s financial stability.Hong Kong Monetary Authority Chief Executive Norman Chan said the authority expected continued or even heightened market volatility in the near future amid expectations that the U.S. Federal Reserve will start winding down its bond purchases, or quantitative easing, later this year.

“The investment environment will be very challenging,” he said.

Looking further ahead, the end of U.S. quantitative easing and interest-rate normalization would bring “immense shocks to the financial markets,” and the HKMA was adjusting its investment strategy accordingly, HKMA Deputy Chief Executive Eddie Yue said in a statement.

The fund is heavily invested in U.S. Treasuries, but Mr. Yue said it had in recent years diversified away from bonds denominated in U.S. dollars and euros to those in other major currencies such as Australian and Canadian dollars. It may also reduce its holdings of long-term bonds to minimize its exposure to rising yields, and may invest in more equities.

The fund’s assets totaled 2.85 trillion Hong Kong dollars as of June 30. For the six months ended in June, the fund had a total investment loss of 6.1 billion Hong Kong dollars, after recording a gain of 19.1 billion Hong Kong dollars in the first quarter.

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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