UNIVERSAL ASSET OWNERS | RESPONSE-LED ANALYSIS
The Exchange Fund's retained Hong Kong-equity exposure traces to the 1998 intervention, but its benchmark, managers and retention rules remain current governance decisions.
By UAO Editorial Team | 10 August 2026
Hong Kong’s Exchange Fund reported an HK$11.8 billion negative contribution from Hong Kong equities in the first half of 2026, on an unaudited basis. The Hong Kong Monetary Authority says the exposure traces to a market intervention 28 years ago, rather than a newly initiated domestic-equity allocation.
The provenance matters for a reserve manager whose first task is monetary and financial stability. But origin is not governance. Official records show that the Fund later decided how much stock to retain, how to benchmark it and who would manage it.
The Exchange Fund reported HK$134.7 billion of investment income for the six months ended June 30. Gains on other equities were HK$53.7 billion, while the Hong Kong-equity line was negative. Total Fund assets stood at HK$4.464 trillion.
In an emailed response to Universal Asset Owners, an HKMA spokesperson said the current portfolio was “part of those securities acquired in 1998 in the course of market operations and not an active investment allocation.”
The spokesperson said the Fund needs to “hold sizeable and highly liquid foreign exchange reserves” so they are available when monetary or financial stability requires them. That explains the foreign-asset bias; it does not erase the current governance questions around the retained Hong Kong book.
HKMA’s published mandate sets the hierarchy: preserve capital; fully back the Monetary Base with liquid U.S.-dollar assets; maintain liquidity; and then seek a return that preserves long-term purchasing power.
From market operation to long-term portfolio
The chronology begins in August 1998, when the government used HK$118 billion of Exchange Fund resources to buy Hong Kong equities amid simultaneous pressure on the currency, stocks and futures markets. The intervention was exceptional and controversial. A Federal Reserve Bank of Dallas review later argued that its operational success depended on disposing of the position without causing another market shock.
The government created Exchange Fund Investment Limited in October 1998 to manage the acquired holdings and return most of them to private hands. But the next step was not simply to sell everything. In March 1999, the Exchange Fund Advisory Committee adopted a long-term benchmark with 20% in equities, including 5% in Hong Kong equities, and said roughly HK$46 billion of the combined Hong Kong portfolio would be kept for long-term investment.
The Tracker Fund of Hong Kong, or TraHK, became the main disposal vehicle. Its 1999 initial public offering raised HK$33.3 billion. By 2002, the government said it had sold HK$140 billion of shares into TraHK, received HK$24 billion in dividends and retained HK$50 billion in the Exchange Fund’s long-term equity portfolio. Those figures include market appreciation and cash flows; they are not a simple reconciliation of the HK$118 billion purchase cost.
The retention decision was explicit. In September 2002, HKMA said a final HK$3.2 billion disposal residual would leave Hong Kong equities at about 5.3% of the Fund, close to the 5% benchmark. At the time, it described a HK$51.5 billion book managed half passively and half actively. Management transferred from EFIL to HKMA in 2003. HKMA’s current history says the portfolio is now managed exclusively by external managers, and its 2025 reserves-management report says all listed-equity portfolios are externally managed.
None of that disproves HKMA’s account of the shares’ origin. It does show the limits of provenance: the historical record includes later allocation, management and retention decisions. Origin explains how the exposure arrived. It does not settle how the exposure is governed today.
What the 2026 accounts do not separate
The first-half accounts draw an important boundary. The HK$11.8 billion negative contribution from Hong Kong equities excludes valuation changes in the Strategic Portfolio, which holds Hong Kong Exchanges and Clearing shares for strategic purposes. Yet the balance sheet reports HK$153.2 billion of Hong Kong equities including those strategic shares.
The HK$153.2 billion line was 3.43% of total Exchange Fund assets at June 30, but it is not the standalone value of the 1998-origin book. The published figures therefore do not permit a reader to calculate that legacy portfolio’s current weight or first-half return. Nor do the current public documents reviewed for this article disclose its current benchmark, active-passive split, rebalancing rule or disposal authority.
For other reserve managers and asset owners carrying inherited positions, the lesson is simple: a legacy asset still creates current market risk and requires current oversight. For outsiders, the unresolved question is the residual book’s present value, mandate and decision rules—not another retelling of 1998.