[ U P D AT E ]
Hong Kong’s
new rules set
to attract wave
of new fund
launches
SETTING UP OFCS IS SAID TO
SAVE TIME AND COST FOR
MANAGERS ESTABLISHING
FUNDS IN OTHER DOMICILES
AND DISTRIBUTING FUNDS IN
HONG KONG.
H
edge funds in Hong Kong can now
establish investment funds in corporate
form as open-ended fund companies (OFCs)
due to new rules which could elevate its
status as a preferred fund domicile.
The rules, which took effect last month,
provide more flexibility for fund sponsors
looking to launch a fund in Hong Kong by al-
lowing them to avoid Companies Ordinance
and set up as private or public funds.
Companies Ordinance prohibits the in-
crease or reduction in capital or payment of
dividends without approval of the share-
holders of the company. Setting up OFCs
is said to save time and cost for managers
establishing funds at other domiciles and
distributing funds in Hong Kong.
“OFC provides more flexibility, in compar-
ison with unit trust, companies, etc., for
fund sponsors who plan to launch a fund in
Hong Kong,” said Remi Toucheboeuf, head
of products, investment and fund services,
BNP Paribas Securities Services.
“The introduction of OFC is expected to
have a positive impact on attracting more
fund launches to Hong Kong which will
contribute to reinforcing Hong Kong’s posi-
tion as an asset management centre and a
preferred fund domicile.”
At present, most funds in Hong Kong use
a unit trust structure which is seen to be
more flexible.
By registering as OFCs their structure can
be more similar to UCITS funds as they
may be structured as umbrella funds, with
multiple sub-funds that have statutory
segregated liability.
In an online blog, Adrian Whelan, senior
vice president of regulatory intelligence,
Brown Brothers Harriman, says it remains
to be seen whether existing unit trusts
will choose to convert to corporate form or
whether OFCs will be new funds brought to
market.
He added that the introduction of the OFC
is a “critical step in the maturation of Hong
Kong as an international fund domicile.”
“The introduction of the OFC, whether
set up under a private or public umbrella, is
widely expected to bring growth opportuni-
ties to Hong Kong as a fund domicile, and
make Hong Kong funds more marketable
across the globe,” added Whelan.
“Hong Kong looks set to benefit from its
long-established fund management indus-
try and its privileged access to Mainland
China.”
The changes come as part of a series of
local market infrastructure enhancements
from the Securities and Futures Commis-
sion (SFC) and government of Hong Kong.
According to Whelan, the SFC plans to
streamline the application process, which
for public OFCs could take between one to
three months.
Whelan added, however, that there is still
work to do and that in the short-term there
will be a “trickle rather than a flood” of new
launches as practical and operational best
practices are established.
When it comes to listing and launching
local funds though, Hong Kong has mainly
been a distribution hub for Luxembourg and
Cayman funds.
This is largely evolving through various
Mutual Recognition of Funds (MRF) pro-
grammes to facilitate cross-border activity.
The most notable of these programmes is
the scheme launched between China and
Hong Kong in July 2015, giving approved
Hong Kong and Chinese funds access to
each other’s markets.
Currently, Hong Kong also has exclusive
access to the MRF schemes with China,
Switzerland, and now France. However, only
a fifth of respondents to the BBH survey be-
lieve Hong Kong will maintain its exclusivity
by 2025.
According to the BBH research last year,
over half believed the introduction of
open-ended fund companies will be very
important to the success of Hong Kong as a
fund hub.
“Hong Kong provides various passporting
schemes which are either live or in progress
such as the mutual recognition schemes,
ETF connect and potentially the Asia Region
Funds Passport (ARFP) at a later stage,”
added Toucheboeuf.
“Passportability of OFCs are not confirmed
yet; however, if confirmed, fund managers
will have another powerful form of fund for
passporting available.”
80%
of the 52 asset managers surveyed by Brown Brothers Harriman
believe there is a medium to high probability that Hong Kong
will be a leading Asian cross-border fund domicile by 2025.
14
Global Custodian
The Hedge Fund Annual 2018