Hong Kong's government announced the details of an alternatives-heavy Future Fund it will launch Jan. 1 to cushion an expected surge in government outlays as the territory's demographic profile ages rapidly over the coming decade.
A sense of urgency has attended the fund's birth, as government advisers warned that demographic time bomb threatened to rapidly close the government's window of opportunity to reap the benefits of investments in illiquid, long-term asset classes.
The fund — which will be overseen by the Hong Kong Monetary Authority — will allocate roughly half of its initial HK$220 billion ($28.4 billion) in fiscal reserves to private equity and global real estate over a three-year period.
In an e-mail, a Hong Kong government spokeswoman said the shift of those reserves from the investment portfolio of the HKMA's exchange fund, with its focus on capital preservation and short-term liquidity, to longer-term investments is being made with “a view to securing higher returns.”
Meanwhile, with government surpluses expected in coming years, the fund could enjoy infusions of as much as 25% to 33% of the annual surplus, depending on the government's broader spending needs for any particular year.
The initiative adds another Hong Kong entrant to a growing list of government-linked asset owners in Asia — including Japan's ¥135.1 trillion ($1.12 trillion) Government Pension Investment Fund and the $86 billion Seoul-based Korea Investment Corp. — evolving from a bond-heavy savings mentality to an investment focus that encompasses alternatives.
What separates Hong Kong's Future Fund from the rest of the pack, however, is that the future it is preparing for is right around the corner — perhaps 10 years away or less.
The working group set up by Hong Kong's government two years ago to offer recommendations regarding the Future Fund and other measures to bolster government finances was acutely aware that the clock was ticking.
With the percentage of Hong Kong citizens over age 65 expected to double to 30% by 2041 from 15% in 2014, the working group's final report in March called on the government to “start planning early, when we can still afford to set aside part of our fiscal reserves for long-term investments with possibly higher returns.”
“Speed is of the essence,” as Hong Kong's structural surpluses are likely to give way to structural deficits within 10 years, the report said.
The government spokeswoman, summarized the working group's projections as anticipating budget surpluses “for the coming few years, but probably not for too long.”
The need for speed dictated the government's decision to have the HKMA's investment team manage the Future Fund's assets, rather than pursuing the more time-consuming options of setting up a separate statutory board or investment trust, Elizabeth Tse, the Hong Kong government Financial Services and Treasury Bureau official who chaired the advisory working group, said earlier this year.
At the depths of the global financial crisis, the HKMA team began investing a fraction of the central bank's currency stabilization fund in a long-term growth portfolio, comprising private equity and global real estate.
In a Dec. 14 speech, Eddie Yue, the HKMA's deputy chief executive, noted the fortuitous timing of the long-term growth portfolio's initial moves into private equity — with that 2009 vintage turning out to be “the best performing” among the portfolio's overall allocations to that asset class. In the six years of the program through the end of 2014, the long-term growth portfolio delivered an annualized internal rate of return of 13.5%.
As of the end of 2014, the long-term growth portfolio amounted to HK$115.2 billion. But Mr. Yue, in his speech, noted the HKMA has been accelerating its long-term investments, with new commitments of US$9 billion for the first 10 months of 2015, up from US$5 billion for the same period in 2014.
Still, some observers say the timing of Hong Kong's Future Fund — at a moment when asset prices around the globe have been lifted by the liquidity central banks have flooded the markets with — might prove less than ideal.
“Why so late to the sovereign wealth fund game,” especially for a group that made such a “gutsy move” into private equity in 2009, asked a senior executive with a Hong Kong-based alternatives firm, who declined to be named.