Risk management in investing the Exchange Fund has been strengthened, Monetary Authority Chief Executive Joseph Yam says, adding the relevant cost incurred is money well spent.

In his latest Viewpoint article, Mr Yam said the Asian financial crisis of 1997-98 underlined the general need for properly managing risks arising from financial markets' globalisation.

He said the authority has devoted much effort to promoting and strengthening risk management in Hong Kong's financial system.

"The investment management of the Exchange Fund is another activity of the HKMA, where we have strengthened risk management."

Considering the volatility seen in recent years in the international financial markets in which the Exchange Fund is invested, the effort in improving risk management has been worthwhile, Mr Yam said.

Major improvements

"This greater emphasis on risk management has affected the engagement of external managers in the investment of the Exchange Fund in several ways over the years," he added.

Multi-currency fixed-income portfolios have been gradually re-structured into specialised single-market portfolios so the external managers can make use of their focused and in-depth knowledge of risks and opportunities in specific markets rather than spreading their attention across several markets.

The Exchange Fund's investments have been expanded to include a wider range of management styles and markets by employing additional external managers to gain market depth, increase diversification, and improve returns.

More stringent reporting and monitoring of external managers' activities have been introduced to ensure they manage the Exchange Fund in accordance with the authority's well established guidelines.

Higher costs

There are, of course, costs involved in the form of higher fees charged by the external managers and custodians, he said.

The higher costs are commensurate with the greater attention required in managing the Exchange Fund portfolios. The engagement of more external managers, with each managing smaller funds amounts, also means a reduction in the volume discount that can be achieved.

But he considered the higher costs for strengthening the risk management money well spent because the potential financial losses from a mishap could be quite large.