Hong Kong Investment
Funds
Hong
Kong is widely recognised as the leading
fund management centre in Asia with the
largest concentration of fund managers.
The industry is characterised by its international
and offshore nature.
Participants
in the Hong Kong market benefit from a
stable, transparent operating environment,
as evidenced in a thriving asset management
sector which, according to Securities
and Futures Commission CEO Martin Wheatley,
saw a 45.4% year-on-year growth in assets
under management to just over USD1 trillion
in 2009.
The Securities and Futures Commission
is responsible for regulating the marketing
to the public of unit trusts, mutual funds
and other collective investment schemes.
The Investment Products Department has
regulatory responsibility for unit trusts,
mutual funds, investment-linked assurance
schemes, pooled retirement funds and immigration-linked
investment schemes as well as other forms
of investment arrangements. These products
require authorisation by the SFC before
they can be marketed to the public in
Hong Kong. The Department vets applications
for such authorisation and monitors ongoing
compliance with regulatory requirements.
The SFC has issued numerous sets of Rules
and Codes of Practice for the guidance
of the investment management sector, including:
See
the Hong Kong Services
Directory for a listing of fund managers
in Hong Kong.
In
Hong Kong, approved Collective Investment
Funds are exempt
from profits tax (for a more detailed
description of Hong Kong's Profits Tax
regime, see Hong
Kong Corporate Taxation).
On
August 10, 2010, the SFC announced the
authorisation of the first fund denominated
in renminbi (RMB) for sale to retail investors
in Hong Kong.
The
SFC has been working closely with industry
participants to enable the introduction
of RMB-denominated investment products
to support the initiative to develop Hong
Kong into an offshore RMB centre.
“Hong
Kong has a unique role in China’s
internationalisation of its currency.
As the RMB becomes more popular and widely
held outside the Mainland, demand for
RMB-denominated investment and financial
products will grow. Hong Kong’s
role is to make these products available
and manage their risks,” said Mrs
Alexa Lam, the SFC’s Deputy Chief
Executive Officer and Executive Director
of Policy, China and Investment Products.
The
first retail RMB-denominated fund was
authorized under the enhanced product
authorization regime.
Hedge
Funds
In
May, 2001, the SFC published guidelines
governing the sale of hedge funds to retail
investors, which divide hedge funds into
three categories - single hedge funds,
fund of hedge funds and hedge funds with
a capital guarantee.
For
single hedge funds, a retail investor
must subscribe at least USD50,000, while
funds of hedge funds, seen to be less
risky, will require a minimum investment
of USD10,000. No minimum investment has
been set for guaranteed capital funds.
However,
the SFC has imposed strict rules on managers
of single hedge funds and funds of hedge
funds, requiring them to have five years'
hedge fund management experience, and
limiting access for retail investors to
fund managers with at least USD100 million
worth of hedge funds under management.
In
November 2001, the SFC gave approval to
the first three retail market hedge funds.
According to a
survey report released by the Securities
and Futures Commission (SFC) in March
2011, Hong Kong’s hedge fund industry
has continued to register a strong growth
rate, both in the number of such funds
and in their assets under management.
The “Report
of the Survey on Hedge Fund Activities
of SFC-licensed Managers/Advisers”
shows that assets under management or
advisory in Hong Kong increased 14% from
the time of the last survey in March 2009
to USD63.2bn as at September 30, 2010.
In addition, the number of hedge funds
managed by SFC-licensed hedge fund managers
in Hong Kong stood at 538 as at September
30, 2010, similar to that in 2009 and
nearly five times the level in 2004, the
earliest year covered in similar SFC surveys.
The hedge funds
are invested mainly in the Asia Pacific,
using equities long/short strategy and
multi-strategy. As at end-September, 66.1%
of the total assets under management was
invested in the Asia Pacific markets.
Overseas investors continued to dominate,
with over 92% of the investors being from
overseas.
“Closer
scrutiny of the hedge fund industry is
a global trend,” said Martin Wheatley,
the SFC’s Chief Executive Officer.
“We will continue to maintain a
balanced approach to regulation with a
view to allowing room for industry development
and growth without compromising investor
protection.”
Speaking
in December 2007 at the 5th Annual Hedge
Funds Conference, Secretary for Financial
Services & the Treasury, Professor
KC Chan suggested that Hong Kong was fast
becoming the hedge fund hub of Asia.
To
back up this assertion, he quoted figures
which showed that the number of hedge
funds in Asia had increased substantially
from 160 in 2001 to about 1,240 in the
first half of 2007. Total assets under
management had also increased by nine
times, from USD16 billion to about USD167
billion during the same period, Professor
Chan revealed.
"Hong
Kong got the largest number of new Asia
Pacific hedge funds launched in 2006 as
well as in the first half of 2007, ahead
of Singapore, Japan and Australia."
"We
have adopted various tax measures to promote
the growth of the industry. Since 2006,
offshore funds have been exempted from
profits tax. This brings us in line with
other major financial centres such as
New York and London. More importantly,
the measure helps attract new offshore
funds to come to Hong Kong and encourages
existing offshore funds to continue to
invest in Hong Kong."
"We
have also abolished estate duty since
last year to encourage local and overseas
investors to invest in Hong Kong. To further
enhance our competitiveness, the Chief
Executive announced in his Policy Address
in October this year that our profits
tax will be reduced from 17.5% to 16.5%
in 2008-09. Given our already low and
simple tax regime, these measures will
further enhance our attractiveness to
overseas fund managers."
2005
Hedge Fund Guidelines
In
September, 2005, the SFC announced new
hedge fund guidelines with immediate effect.
The SFC published its conclusions on the
Consultation Paper on the Review of the
Hedge Fund Guidelines (HF Guidelines)
contained in Chapter 8.7 of the Code on
Unit Trusts and Mutual Funds, which were
generally supportive of its main proposals:
-
to adopt a holistic approach in the
assessment of a management company,
and providing greater flexibility in
recognising the experience of fund manager’s
key personnel;
-
to increase the transparency of the
management company’s operations
through additional disclosures in the
offering documents of its risk monitoring
and due diligence process; and
-
to consolidate and codify existing SFC
regulatory practices in the application
of HF Guidelines by way of additional
notes.
However,
taking into consideration the responses
of the Consultation Paper, recent international
regulatory developments, and the need
to ensure investor protection, the SFC
has decided that:
-
the minimum subscription threshold for
SFC-authorised single hedge funds is
maintained at USD50,000; and
- there
will not be a relaxation of the current
restriction imposed on the level of
collateralisation to prime brokers for
SFC-authorised hedge funds.
The
SFC says it will keep monitoring the overseas
regulatory and market developments regarding
these two issues, and may revisit them
in the future.
Respondents
also provided comments relating to other
provisions of the HF Guidelines. In view
of these comments, the SFC has made revisions
to clarify its regulatory intent on certain
provisions, such as the requirements on
valuation. The HF Guidelines requires
SFC-authorised hedge funds to value their
assets in a fair and independent manner.
A principles-based approach has been adopted
in the revised HF Guidelines to set out
the general principles in respect of fair
and independent valuation, including the
need to ensure proper segregation of the
functions of investment management from
those of valuation and the need to maintain
proper checks and balances in the way
valuation is carried out.
Mrs
Alexa Lam, SFC’s Executive Director
of Intermediaries and Investment Products,
said: “The Commission is fully aware
of the changing international regulatory
landscape for hedge funds. Extensive discussions
about the risks associated with hedge
funds and how to handle these risks are
taking place among industry and market
practitioners as well as regulators in
major overseas jurisdictions. As one of
the first jurisdictions to allow the sale
of hedge funds to the investing public,
the Commission will continue to monitor
the international regulatory developments
in the hedge fund arena, and make further
changes to the HF Guidelines when necessary.”
In
a speech to the HFR Industry Summit Asia
in September 2010, Chang said that more
stringent regulation of the hedge fund
industry in the US and the EU would "inevitably"
have an effect on Hong Kong's hedge fund
sector.
"Regulations,
particularly in the financial sector cannot
be expected to have a local effect only.
Developments in the EU and the US relating
to regulation of hedge funds will inevitably
have a huge impact on the international
asset management industry," he said.
"We believe any regulations coming
out of the EU should not discriminate
against non-EU managers. We are supportive
of co-operative arrangements between the
authorities but they should be in line
with international standards. Regulations
should also be predictable and consistent,"
he added.
Of
the total hedge fund assets managed in
Hong Kong, about 40% are funded by European
investors. Therefore, it is "critical,"
Chang noted, that Hong Kong's hedge funds
can continue to service their European
clients.
"We
are committed to designing regulations
that are suitable for our needs and our
markets. We need to strike a balance between
the goal of having a quality market and
maintaining a forward-looking market friendly
approach," he said.
Hong Kong's Securities
and Futures Commission (SFC) announced
in February 2011 that it was proceeding
with proposals to refine the requirements
for evidencing whether a person qualifies
as a high-net-worth professional investor.
The purpose of
the proposals is to create more flexibility
by adopting a principles-based approach
whereby firms may use methods that are
appropriate in the circumstances to satisfy
themselves that an investor meets the
relevant assets or portfolio threshold
to qualify as a professional investor
under the Securities and Futures (Professional
Investor) Rules.
The SFC takes
the view that it would not be desirable
to seek to prescribe all the possible
ways that an investor could demonstrate
that they have the relevant assets so
as to qualify as a professional investor
under the Professional Investor Rules
(PIR). The SFC will rely on the firms’
professional judgement to decide the methods
by which they can satisfy themselves that
their clients have the required assets
or portfolio levels at the relevant date.
The SFC therefore
expects firms to keep proper records of
their assessment process so as to demonstrate
that they have exercised professional
judgement and have reached a reasonable
conclusion that their clients meet the
relevant thresholds, for example, keeping
copies of the documents they have relied
on to assess clients’ means.
In addition, however,
to enable firms that so wish to continue
with existing practices, the current methods
for proving that investors qualify as
professional investors will be preserved.
Under the previous
PIR, there are four types of high-net-worth
professional investors - a trust corporation
with total assets of not less than HKD40m
(USD5.1m), or its equivalent; an individual
with a portfolio of not less than HKD8m;
a corporation or partnership with either
a portfolio of not less than HKD8m or
total assets of not less than HKD40m;
or a corporation the sole business of
which is to hold investments and which
is wholly owned by an individual who has
a portfolio of not less than HKD8m.
REITs
In
August, 2003, the Securities and Futures
Commission decided to allow Reits (Real
Estate Investment Trusts) to take the
form of Collective Investment Funds, leading
the stock market regulator HKEx (Hong
Kong Exchanges and Clearing) to simplify
the listings process for all Collective
Investment Funds, including Reits.
HKEx
announced that it had amended Chapter
20 and its ancillary sections of the Main
Board Listing Rules for the purposes of:
- Creating
a listing and trading platform for all
collective investment schemes that are
authorised by the Securities and Futures
Commission (the “SFC”);
-
Clarifying the respective regulatory
roles of the SFC and the Exchange in
the initial listing of, and the on-going
regulatory monitoring of, collective
investment schemes; and
-
Streamlining the listing process for
authorised collective investment schemes.
The rule change came into effect on 1
September 2003.
HKEx
announced:
"Since
the offer structure and offer document
of a collective investment scheme would
have been vetted by the SFC during its
authorisation process, the Exchange’s
role at the time of listing will be confined
to ensuring compliance with procedural
aspects of the listing process. Therefore,
the function to grant listing approvals
will now be discharged by the Listing
Unit, instead of the Listing Committee,
of the Exchange."
"An
authorised collective investment scheme
listing applicant will no longer require
a “sponsor”. Given the involvement
of the SFC in all aspects of the approval
of a CIS, the SFC is in a position to
impose requirements as to the qualification
and behaviour of persons involved in arranging
the offering of interests in a CIS. The
new rules simply codify the current practice
of the Exchange in accepting the administrative
nature of the listing related work of
the “sponsor”, which can be
carried out by an experienced agent of
the CIS."
Initially,
many Hong Kong institutions expressed
major doubts about the usefulness of Reits
in the SAR, but recently property companies
and agencies have warmed to the idea.
The Housing Authority is said to want
to use reits to dispose of $20 billion
worth of car parks and shopping centres,
while Sun Hung Kai Properties, Cheung
Kong (Holdings) and Hutchison Whampoa
have all expressed interest.
In
July, 2005, the Court of Final Appeal
finally rejected an application by an
elderly resident of the territory for
a permanent ban on the government's USD3
billion real estate investment trust (REIT)
plan.
The
launch of the massive REIT offering -
which includes 180 car parks and almost
1 million square metres of retail space
- was set to take place in December, 2004,
but Lo Siu-lan, an elderly resident of
government-owned accommodation submitted
a last minute application for a judicial
review, in which she argued that the deal
undervalued the assets, and could lead
to higher costs for tenants.
However,
in an unanimous judgment, Hong Kong's
highest court held that the Housing Authority
"plainly has the power to sell the...
retail and car park facilities to the
Link REIT."
Hong
Kong's nascent market for real estate
investment trusts (REITs) has "huge potential"
for growth, with potent sources of growth
located in mainland China and the other
parts of Asia, according to Martin Wheatley,
Chief Executive Officer of the Securities
and Futures Commission.
Wheatley
said in September, 2006, that the REIT
market was relatively new in Hong Kong,
but the capitalisation of the four REITs
launched up to that point had reached
USD6.5 billion, with average daily turnover
of USD38 million in the first seven months
of the year.
Giving
the keynote address at the Asia Pacific
Real Estate Securitisation Summit 2006,
Mr Wheatley said the opportunities presented
by the sheer size of the Mainland and
its rapidly growing economy were a major
driving force of the Hong Kong REIT market.
“The
size of Hong Kong is limited and Hong
Kong has already got a substantial universe
of listed real estate assets in the form
of listed property companies," Wheatley
observed.
"A
significant part of the growth of our
market will be through the process of
overseas investments by REITs in Hong
Kong. In the process, it is only natural
that issuers of REITs will look to the
Mainland for assets. It is physically
close to Hong Kong; market practitioners
and Hong Kong investors are familiar with
the languages, culture, business practices
and systems in the Mainland,” he added.
On
June 25, 2010, the SFC announced the application
of the Codes on Takeovers and Mergers
and Share Repurchases (Codes) to SFC-authorised
real estate investment trusts (REITs)
with immediate effect following a public
consultation on the proposals earlier
in the year.
The
majority of the proposals published in
January 2010 have been adopted, with some
modifications and amendments to take into
account responses received during the
two-month consultation process.
"We
believe that the implementation of the
proposals represent a significant step
forward in establishing a regulatory framework
that better protects the investors’
interests and assists the further development
of the REIT market in Hong Kong,"
said Martin Wheatley, the SFC's Chief
Executive Officer.
The
proposed amendments to the Code on REITs
(REIT Code) and the Codes include aligning
the control structure of REITs with that
of listed companies and introducing a
set of REIT Guidance Notes. Unitholders
who increase their holding to 30% or more
will be subject to the trigger provisions
under the Codes. Likewise, unitholders
holding between 30% and 50% who increase
their holding by more than 2% from the
relevant lowest percentage in the 12-month
period preceding the relevant increase
in holding will also be subject to the
creeper provisions of the Codes.
Consistent
with the objective of ensuring as far
as possible that all unitholders are neither
advantaged nor disadvantaged, no transitional
arrangement will apply.
Exchange-Traded
Funds
In
June 2010, Alexa Lam, the Deputy Chief
Executive Officer and Executive Director
of Policy, China and Investment Products
of the SFC, said that exchange-traded
and index funds are “one of the
fast-developing segments of our markets.
Speaking
at The Art of Indexing Summit Asia in
Singapore, Mrs Lam noted that Hong Kong
had seen significant changes in the last
few years in the number and types of these
funds on offer in Hong Kong.
Mrs
Lam indicated that some of the forthcoming
revisions to Hong Kong’s Code on
Unit Trusts and Mutual Funds had been
made to take account of market developments
in certain areas, including index funds.
She pointed to the increasingly broad
range of asset classes tracked by index
funds and the number of index funds using
representative sampling or synthetic replication
to track indices or benchmarks.
The
Code on Unit Trusts and Mutual Funds applies
to funds offered to the public in Hong
Kong. During her address, Mrs Lam drew
attention to the requirement for sufficient
information to be provided to investors
to enable them to make informed judgments
about the products and, in the case of
index funds, for indices to be “acceptable”,
rules-based and impartial. The revised
Code, she said, also included detailed
provisions applicable to authorized funds
seeking to use swaps and other derivatives
to achieve their investment objectives,
as this strategy could affect the risk
characteristics of the funds and limit
transparency.
Speaking
about developments in exchange-traded
funds (ETFs), Mrs Lam said, “Certainly
the demand for ETFs is there. ETFs are
not just the domain of the retail investor,
of course. I’d note that we’re
seeing increasing use of ETFs by institutional
investors as well. This has implications
at the design stage, with product providers
catering to a broader range of investors
with increasingly diverse investment needs,
and it also has implications for the way
in which ETF units trade in the secondary
market.”
BACK
TO TOP
Lowtax Network Portal
Front Page
Tax Jurisdictions
Featured Content
