Better than expected returns in the US bond market helped the Exchange Fund achieve modest gains this year, despite it losing money on the local stock market. Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong admitted he had got it wrong when he issued a 'profit warning' earlier this year, in which he predicted an overall loss for the fund. The authority manages the Exchange Fund, which had HK$994 billion in assets under management at the end of last month. These include the stock portfolio the Government bought during its market intervention in 1998. The bulk of the fund, 80 per cent, is invested in bonds and the rest in equities. The currency mix of the fund is 80 per cent US dollars, 15 per cent euro and 5 per cent yen. Mr Yam yesterday gave some early indications about the way the fund had performed in his weekly authority Web site column. A full accounting and report on the fund's performance will be released by the authority next month. 'When the year is over, it is likely that we will have lost money on our Hong Kong equity portfolio and on our exposure to the euro,' Mr Yam said. 'But our strategic positioning in the bond market will have saved the day for us, to the extent that, on present indications, we may after all be able to show some modest profit for the Exchange Fund. 'This would be better than the performance of many privately run investment funds.' Earlier in the year Mr Yam had said: 'Although we would always try our best in the management of the substantial reserves that belong to the people of Hong Kong, a loss for the year as a whole might well be on the cards.' He defended this earlier position claiming that his predictions had been based on an expectation that last year's stock market rally would not be repeated this year and the assumption that the United States' interest rate rises would hurt the performance of the bond market. 'I was right when I took the realistic view that the Hong Kong stock market might not be able to repeat its impressive performance in 1999,' he said. As a result of that, the fund's stock portfolio of about HK$150-billion would show a substantial loss this year when marked to market, he said. The Exchange Fund's investment in the euro also suffered losses as the currency depreciated about 9 per cent during the year. 'The extent of the weakness, I must confess, was unexpectedly large,' he said. The losses on stocks and the euro were offset by bond returns. US interest rates were raised three times during the course of the year for an aggregate of 1 per cent and this was expected to hurt bond prices. However, the US Government posted a fiscal surplus and began using some of this for a bond buy-back programme and this, in turn, boosted bond prices. As a result the Exchange Fund, with its 80 per cent leaning towards bonds, was able to achieved a better than expected return, Mr Yam said.