Hong Kong Monetary Authority Looks To Diversify Its Portfolio (BX)

According to a report by the Financial Times, in order to manage its ballooning reserves more aggressively, the Hong Kong Monetary Authority is investing in higher risks; higher return investments such as hedge funds and private equity. Private equity firm Kohlberg Kravis Roberts has already received money from the authority, while other firms such as Bain and Blackstone (NYSE: BX) have received investments or are holding discussions with the HKMA, a source familiar with this development has revealed.

Apart from parking its money in hedge funds and private equity, many of which are focused on Asia, the HKMA is also planning to invest more money in mainland China. The increased focus on "alternative" investments marks a shift from the conservative investing approach that the quasi-central bank took earlier. Traditionally, HKMA has put its reserves in safe liquid investments. Unlike its peers, it is required by law to back its own currency with US dollars to maintain the currency peg that has been in place since 1983. But now it has more flexibility to invest in riskier assets as the monetary authority now has more reserves than required to maintain the peg.

Joseph Yam, a former head of HKMA, said "You don’t need all of the funds to help keep the Hong Kong dollar stable." In recent years, HKMA has witnessed huge inflows of US dollars into its coffers as demand for Hong Kong dollars from mainland China and overseas market to buy shares and properties in Hong Kong have increased considerably. For the year ending 2008, the authority’s exchange fund had total assets of HK$1.560 billion (US$ 201 billion). HKMA's annual report says that the compounded annual return on the exchange fund since 1994 has been 6.1%, a rate of return more successful than that of any other sovereign fund.

"There is now scope for diversification on a cautious and incremental basis," says a person close and familiar with the HKMA's thinking. Even though the authority declined to comment on investment operations for the exchange fund, it said that the fund was "under regular review to ensure that [it was] prudently managed to achieve its statutory objectives".

Meanwhile, the future role of the Hong Kong dollar is also being debated as China is gradually reducing the barriers towards free convertibility of its currency. As the local stock market attracts an increasing number of foreign issuers, the HKMA’s task has become more complicated as it handles massive inflows and outflows of capital. Since issuers have no natural funding need for the Hong Kong currency, Hong Kong dollars raised in these offers are swiftly converted into either US dollars or Chinese yuan.