Hong Kong's Exchange Fund reported a 5.2% annual investment income last year, bouncing from a weak performance in 2022 but faces mounting challenges ahead from U.S. monetary policy and geopolitical tensions, the Hong Kong Monetary Authority (HKMA) said on Friday.

The territory's de-facto sovereign fund, which is used to back the Hong Kong dollar and has HK$4.02 trillion in assets, posted a HK$212.7 billion ($27.2 billion) investment gain in 2023.

That compares with an investment loss of HK$202.4 billion in the previous year.

"The investment environment in 2023 was extremely volatile and challenging." Chief Executive of the HKMA Eddie Yue said in a statement.

"Looking ahead in 2024, global financial markets will continue to face numerous challenges," Yue said, referring to uncertainties in U.S. Federal Reserve's pivot to rate cuts, elections in major economies and geopolitical tensions.

Exchange Fund posted an investment gain of HK$101.8 billion in the fourth quarter, following a HK$5.5 billion loss in the third quarter.

The HKMA is the key manager of the Exchange Fund, which is under the control of the financial secretary and invests in equities, bonds, foreign exchange and other securities and assets. (Reporting by Donny Kwok and Selena Li; Editing by Jacqueline Wong and Shri Navaratnam)