The Hong Kong Exchange Fund made a record loss of HK$83.3 billion on its investments for the first three quarters this year mainly due to the sharp fall in stock markets.

The Hong Kong Monetary Authority (HKMA) chief executive, Joseph Yam, said the HKMA faced unprecedented challenges in managing the fund amid the financial crisis. Yam also warned of a loss in the fourth quarter.

The Exchange Fund, which the SAR government uses to support the Hong Kong dollar, turned red for the third consecutive quarter. It posted an investment loss of HK$48.3 billion in the third quarter on top of a HK$35 billion first half loss.

"It was a really bad time in October," Yam told the Legislative Council in a financial affairs panel yesterday, admitting there will be losses in the fourth quarter.

The Exchange Fund is likely to see a full-year loss, for the first time since the HKMA was set up in 1993.

Yam said the word "difficult" fails to reflect the extent of problems the HKMA has been facing." The once-in-a-century global financial crisis has led to huge volatilities in various markets," he said.

The investment loss was largely because of a rout in stock markets. The loss on Hong Kong equities amounted to HK$56.9 billion for January-September, while loss on other equities stood at HK$43.2 billion.

Due to the surprisingly strong US dollar, most of the floating currencies have depreciated significantly against the dollar, and the fund recorded a remarkable exchange loss of HK$13.8 billion. The global foreign exchange market has been highly volatile, which is unfavorable to the stability of the Hong Kong dollar exchange rate.

"This winter will be very cold, but I hope spring would set in soon," he told reporters yesterday.

The Exchange Fund loss resulted from a 5.8 percent negative return. Yam noted that the fund performed much better than other funds in terms of return, adding that the negative return is acceptable, thanks to the very prudent investment strategies.

Patrick Shum, a strategist with Karl Thomas Securities, said the Exchange Fund negative return is not too bad. "Most of the funds recorded double-digit loss so far this year," he added.

As Hong Kong equities are the assets left over from the market operation by using the Exchange Fund 10 years ago, the HKMA stressed that it has no plan to sell those stocks, though a large fair value loss was recorded.

But Shum suggests the HKMA introduce more flexible investment strategies.

The HKMA chief, however, said that the Exchange Fund loss will not affect the SAR government's revenues. The fees of more than HK$40 billion paid to the Treasury will not be changed, representing a return of six-year moving average of 9.4 percent.

"Of course, this year's loss is going to reduce the six-year return next year, but with a very high predictability," Yam said.

(HK Edition 11/22/2008 page2)