The Exchange Fund, which exists to support the Hong Kong dollar's peg to the US dollar, said its investment income rose 310 per cent quarter-on-quarter to HK$24.2 billion by March 31, lifted by gains in Hong Kong and global stock markets. The Exchange Fund is managed by the city's de facto central bank, the Hong Kong Monetary Authority (HKMA), and invests in stocks, bonds and foreign currencies. Analysts and bankers said the performance of the fund was largely in line with market expectations, and the fund had kept its portfolio stable. Despite the improved results, HKMA deputy chief executive Eddie Yue said the global investment outlook was still uncertain because of uncertainty over US fiscal policy, interest rate fluctuations, and the euro zone sovereign debt crisis. Yue told lawmakers at a hearing yesterday that the HKMA would continue to manage the fund in a prudent manner. The fund recorded a HK$2.9 billion loss on its bond investment for the first quarter, a large proportion invested in US government bonds, according the HKMA. This is an improvement over its HK$18.6 billion loss in the fourth quarter of last year. 'The fund's investment in eurobonds cost them quite a lot last quarter,' VC Brokerage director Louis Tse Ming-kwong said. 'For the last few months, there has been a lot of instability in the markets, and investors have fled to US government bonds as a safe haven, driving up bond prices.' Foreign exchange investment was the largest contributor to income - a total of HK$14.5 billion from January to March, up 2,800 per cent from last quarter. The fund lost HK$3.1 billion in foreign exchange investments for the whole of 2010. Andrew Fung Hau-chung, head of treasury and investment at Hang Seng Bank, attributed the foreign exchange gain to the weakening of the dollar during the first quarter against currencies such as the euro, which could be part of the fund's portfolio. 'Even though the bulk of the funds' investments are in US dollars, the Hong Kong dollar is pegged to the US dollar,' thus the foreign exchange exposure only comes from non-US dollar currencies, Fung said. The US dollar fell 5.88 per cent against the euro in the first quarter. Equity investment in stock markets excluding Hong Kong earned an income of HK$8.9 billion, down 53.65 per cent from last quarter. Hong Kong equities market contributed HK$3.5 billion, down 18.6 per cent quarter on quarter. The fund made a profit of HK$79.4 billion last year, 26.28 per cent below the HK$107.7 billion it made in 2009, but better than the HK$75 billion loss in 2008 during the height of the financial crisis. The value of the Exchange Fund grew to HK$2.35 trillion as of the end of last year from HK$2.15 trillion a year earlier. The fund's performance affects the government's income. Despite the fund's poor performance last year, the government received HK$33.8 billion in fees from the fund - more than the HK$33.5 billion in 2009. The fee is based on the fund's six-year average return up to the year in question. The HKMA got the nod from mainland regulators to become a qualified foreign institutional investor around January and has been working with the State Administration of Foreign Exchange on how much it will be allowed to invest in mainland stocks and bonds. It has a quota of investing up to 15 billion yuan (HK$17.7 billion) in the mainland's interbank bond market.