Hong Kong and emerging markets will likely face continued capital outflows given tapering by the US Federal Reserve and the gradual normalisation of interest rates from a very low level, the top official of the Hong Kong Monetary Authority said. "In the face of the expected unstable financial and investment environment in 2014, the HKMA will continue to closely monitor market developments to help safeguard monetary stability, and require banks to step up the management of interest rate, liquidity and credit risks," HKMA chief executive Norman Chan tak-lam wrote in the annual report, The HKMA will continue to closely monitor market developments NORMAN CHAN, HKMA CHIEF Chan, who earned 5.89 per cent more last year to take a total of HK$9.96 million home, said the authority would continue to prudently manage the Exchange Fund, which earned HK$81.2 billion. The Exchange Fund's investments include properties in big cities outside Hong Kong. The authority also set up two more fully-owned subsidiaries in Real Horizon Investment and Real Summit Investment in 2013 for property investments, bringing to three the number of wholly owned units in the property sector for the Exchange Fund, according to its annual report released yesterday. At the end of last year, the market value of property holdings under these three subsidiaries amounted to HK$17.6 billion, up from HK$16.3 billion in 2012. In order to mitigate the risk of the Exchange Fund bond portfolios caused by rising interest rates, the authority has been diversifying the Exchange Fund's investment since 2008 into alternative asset classes such as emerging market bonds and equities, private equity, overseas properties and yuan-denominated bonds and equities to manage the risk better and generate higher medium to long-term returns. The aggregate market value of private equity and real estate investments totalled HK$88.6 billion last year, including HK$24.4 billion from property investment by the fully-owned subsidiaries and joint-venture companies, HKMA said. This translated to an annualised internal rate of return of around 15.9 per cent since their inception. The authority expected administrative expenses to reach HK$1.44 billion in 2014, up 15.2 per cent from the HK$1.25 billion last year.