Notwithstanding the roller coaster in equity prices in recent weeks, the monetary and financial systems of Hong Kong appear robust, Monetary Authority Chief Executive Joseph Yam says, adding that the only area that people need to be alert to is the operation of hedge funds.

In his latest Viewpoint column on the authority's website, Mr Yam said there has been considerable volatility in the past few weeks in financial markets worldwide, as the focus has sharpened on the confluence of risks arising from a number of developments.

These include the transition of monetary policies to more neutral settings, the macroeconomic adjustment on the Mainland, high prices of oil and other commodities, persistent global imbalances, and high levels of household indebtedness in some countries.

He said volatility is an inevitable feature of financial markets with liquidity, particularly those of an international financial centre.

Ensure interests are well protected

Although volatility is inevitable, Mr Yam said the regulators, the intermediaries and the investors have to learn to live with it and make sure their respective interests are well protected.

"The only area that we need to be alert to is the operation of hedge funds, or whatever other name we call them. There continues to be a serious lack of transparency in what they do, how they do it and how leveraged they are. And there probably are funds of these hedge funds that may also be highly leveraged and as opaque.

"It is possible that the sharp volatility we saw recently was, to a significant extent, a reflection of forced, mass liquidation of positions by a group of these funds, triggered by sudden market movement in a particular direction, which could itself be the result of new market positions taken by another group in the same direction."

There is no clear information on these funds or on their activities, and therefore no mechanism for close monitoring, Mr Yam said.

He urged people who deal with them, in particular the lending institutions providing the leveraged funding, continue to exercise the counter-party discipline that we have been promoting since our last encounter with the so-called macro hedge funds.