In carrying out its investment activities, the Exchange Fund assumes various types of risks. The HKMA has established stringent controls and investment guidelines for both internally and externally managed portfolios, and closely monitors compliance with the guidelines and regulations. The relevant risk assessment has also been strengthened to support the Exchange Fund’s increased pace of investment diversification.
The HKMA’s Risk and Compliance Department is responsible for monitoring the risk exposure of the Exchange Fund, assessing compliance of investment activities against established guidelines, reporting and following up on any identified breaches. To ensure good governance, the Risk and Compliance Department is independent of the front office functions and reports directly to the Chief Executive of the HKMA.
The HKMA has established an internal credit exposure policy, which sets out the credit risk management framework for the investment activities of the Exchange Fund to ensure compliance with the credit requirements of the Exchange Fund.
The market risk of the Exchange Fund is measured and monitored mainly using a Value-at-Risk (VaR) methodology. Stress tests are conducted on a regular basis. The HKMA also regularly monitors the tracking error against the limit endorsed by the Exchange Fund Advisory Committee to prevent the Exchange Fund from taking unduly large market risk with respect to its investment benchmark.
There are various internal investment restrictions to ensure the sufficient liquidity of the Exchange Fund’s assets to meet liabilities and exceptional needs. Currently, the Exchange Fund invests primarily in liquid financial markets and instruments that are readily realisable.
The HKMA has formalised an operational risk management framework, which includes identification and monitoring of key risk indicators, and reporting to the management on the operational risk profile.
Long-Term Growth Portfolio (LTGP)
The investment risks of LTGP are managed at the aggregate level through measures such as asset class approval, allocation limit and general partner exposure limit. The cap for the market value of investments under the LTGP is set at the aggregate of one-third of the accumulated surplus of the Exchange Fund and the portion of the Future Fund and placements by subsidiaries of the Exchange Fund linked to the LTGP. Alongside the due diligence performed by the front office, the Risk and Compliance Department performs independent business risk assessment of investment proposals, including track record and reputation of the partners, capability and stability of the investment team, and financials, risk factors and risk mitigants of the investment proposals, etc. Post-investment monitoring is also performed on an ongoing basis to review matters such as ongoing capital calls, risk concentration issues and compliance with investment agreements.