HKMA Exchange Fund increases exposure to managers with local presence
The Hong Kong Monetary Authority’s Exchange Fund has gradually increased its investment exposure to external managers with “major operations” in Hong Kong in recent years to encourage their business expansion in the financial centre.
“The HKMA attaches great importance to the operating situation of the investment managers in Hong Kong. For instance, their business scale and whether there has been business expansion in Hong Kong in recent years,” Christopher Hui, the city’s Secretary for Financial Services and the Treasury, said in a statement to lawmakers.
The Exchange Fund has a dual mandate: to defend the value of the Hong Kong dollar against the US dollar under the linked exchange rate system, and secondly, to maintain the stability of Hong Kong's monetary and financial systems as well as the city’s status as an international financial centre.
In a written reply to a lawmaker’s question in early July, Hui disclosed that 29% of the Exchange Fund’s assets were managed by external managers as at the end of 2023.
The fund’s total assets stood at HK$3.98 trillion ($509.3 billion) as of end-June.
Roughly HK$690 billion of public market investments are outsourced to 80 investment managers. About 90% of these assets are managed by firms with offices in Hong Kong.
According to Hui, stock investments in the Hong Kong market are managed by a local team of about 20 external managers. Over the past few years, the fund has also invested in 32 local hedge funds through various channels.
The HKMA has also been supporting a number of investment managers focused on local investments through other channels, and has worked to attract experienced investment managers to set up offices in Hong Kong, Hui said, without elaborating.
Local stocks accounted for HK$128.4 billion, or 3.2% of the fund’s total assets by end-June.
In the private markets, the fund invests about HK$517 billion in global private equity and overseas real estate under the designated long-term growth portfolio. These investments carry a general investment duration of 10 years.
The HKMA mainly appoints “internationally renowned” investment managers as general partners (GPs), and over 60% of this group have offices in Hong Kong, Hui said, without giving specific numbers.
About 79.6%, or HK$411.9 billion, of the private-assets portfolio was in private equity, while the remaining has been deployed in real estate. The portfolio had an annualised internal return rate of 11.8% since inception in 2009 to 2023, down from 15.4% as of 2021, the HKMA’s annual reports showed.
FEE PRESSURES
Overall management fees of external investment managers in 2023 were about 0.43% of assets managed. Managers’ fees vary by asset type, Hui said.
Generally, asset owners tend to utilise more than 10 managers for traditional asset investments. and more than 35 in hedge fund, private credit and private equity investments, according to Adeline Tan, wealth business leader and partner at Mercer Hong Kong. The number of managers for real estate and infrastructure is usually smaller due to the narrower breadth of opportunities, Tan said.
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“The downward pressure on fees for public and private markets continue to be felt by all investment service providers,” she told AsianInvestor.
Preqin data showed that the average management fee charged by Asia-Pacific focused private equity managers was 2.05% as at end-July. The fee stood at 1.34% for real estate managers.
MAINTAINING LIQUIDITY
To ensure a high level of liquidity and to avoid additional pressure if the Hong Kong market faces a shock, and assets need to be sold to maintain financial stability, the fund primarily holds foreign-currency assets, accounting for 96% of total assets.
“The HKMA engages 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, drawing on diverse and complementary investment styles, and gaining market insights and technical expertise in investment,” a spokesperson told AsianInvestor.
“We do not fix the number of external managers employed, and will continue to increase or decrease the number of managers according to our investment needs,” the spokesperson said.
The spokesperson declined to provide details on the fund’s external managers due to market sensitivity.
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In recent years, some overseas asset owners, managers, and financial service providers have scaled back or shut down their operations in the city amid the Covid-19 outbreak, China’s economic slowdown, and the introduction of the National Security Law.
Despite challenges, Hong Kong remains an important financial hub in Asia. The total assets under management (AUM) of the city’s asset and wealth management business stood at $3.99 trillion as of end-2023, with over 50,000 staff employed, according to the latest data from the Securities and Futures Commission (SFC).
Licensed asset management firms increased by 3% to 2,127 in 2023 from a year ago. Several of the biggest names in the fund business including BlackRock, Invesco, State Street, and Blackstone have a major presence in the city.
SUPPORTING LOCAL GROWTH
According to Hong Kong government, the Exchange Fund has in recent years established alternative asset portfolios with dedicated allocations to smaller local managers.
“As a next step, such portfolios will cover also private equity funds managed by smaller local managers and those seeking to expand their Hong Kong operations in order to support their continued growth here,” Hong Kong Financial Secretary Paul Chan Mo-po said in the 2023-24 budget.
The fund has a list of selection criteria for external managers, which has been in place since 2002. It assigns a heavy weighting to the institution's integrity, investment performance, and its commitment to Hong Kong.
“A co-incidental outcome is the growth of Hong Kong as a fund management centre because the majority of external managers and related service providers, such as custodians used by the Exchange Fund, either set up or expand their presence in Hong Kong after their appointments by the Exchange Fund,” the HKMA wrote in a manager selection guidance document.
“A local presence greatly enhances the dissemination of market information and the quality of administrative support to the Exchange Fund,” it said.
Industry experts previously told AsianInvestor that it is not unique for government investment institutions to require managers to have a local presence. Those in Singapore and Malaysia also have similar requirements as part of a broader development plan.