Hong Kong fund managers urged government to invest new future fund in unconventional assets

The government should consider investing in unconventional and less-liquid assets as part of its strategy so its new future fund can enjoy better returns, fund managers have recommended.

The fund, made up of the HK$220 billion land fund and a third of future government surpluses, is being set up to hedge against budget deficits. Government-appointed experts have warned that a structural deficit could emerge in a decade as the city's workforce shrinks.

The fund managers' proposals came after Financial Secretary John Tsang Chun-wah announced in his budget last week that the future fund would be set up this year. The investment approach will be determined by the Financial Services and the Treasury Bureau as well as the Hong Kong Monetary Authority.

Unconventional, or alternative, assets generally refers to private equity, property, commodities and even works of art. They usually increase in value over a longer timeframe than conventional assets like bonds and stocks. They involve higher risk, but can yield higher returns.

"Taking a longer-term and more strategic approach with a portion of the reserves is a sensible approach," said Mark Konyn, CEO of Cathay Conning Asset Management. "The benefit of taking a longer-term approach is that immediate liquidity is not the main focus and therefore institutions can be rewarded for giving up short-term liquidity."

Hong Kong Investment Funds Association chairman Bruno Lee Kam-wing also said long-term investment should not be confined to conventional assets, adding: "A rise in interest rates could also have a negative impact on bond investments."