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Hong Kong: Wealth Management

Alternative Investment

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.

In July 2010, Securities and Futures Commission's annual survey of fund management activities showed that fund management in Hong Kong rebounded strongly in 2009, despite the uncertain economic and investment climate.

The survey indicates that international investors continued to use Hong Kong as the platform for investing in the region, with fund management business growing to just over HKD8.5 trillion (US$1.1 trillion) as at the end of 2009, representing an increase of over 45% compared to 2008.

Overseas investors contributed almost HKD5.4 trillion (or nearly 64%) to that business, excluding real estate investment trusts (REITs). Meanwhile, the SFC has pointed out that an increasing number of Chinese mainland-related firms gained exposure to global investment practices via Hong Kong, using it as a springboard.

Licensed asset management and fund advisory houses continued to contribute the largest proportion of the combined asset management business in Hong Kong, recording the biggest year-on-year increase of 50% in the value of their aggregate asset management and fund advisory businesses, to a total of HKD6.45 trillion in 2009.

In addition, registered financial institutions recorded an almost 30% increase in their aggregate asset management and other private banking businesses, to HKD1.8 trillion last year.

Non-REIT asset management business increased by 57% to more than HKD5.8 trillion. Of this amount, HKD3.5 trillion worth of assets were managed in Hong Kong, with over 80% of these assets being invested in Asia. The market capitalisation of SFC-authorised REITs expanded 60% in 2009.

The report also highlights the growth of the exchange-traded-fund (ETF) market in Hong Kong, and the first-time cross-listing of ETFs in Hong Kong and Taiwan. As at the end of June 2010, 62 ETFs were listed in Hong Kong. The trading volume of the ETFs increased by 12.5% to an average daily turnover of almost HKD2 trillion in the year to June 2010, while their market capitalisation rose 30% to HKD180bn in the same period, making Hong Kong the second largest ETF market in Asia.

The report also notes the increasing number of mainland-related financial institutions setting up operations in Hong Kong. The total asset management and fund advisory businesses of mainland-related companies that participated in the survey increased 70% in 2009 to HKD155bn.

Separately, the SFC has reviewed the growth of the retail fund business in Hong Kong since the establishment of the SFC in 1989. It found that the number of retail funds offered to the public has grown from 783 at the end of 1989 to 1,980 in 2007. In value terms, the size of retail funds has grown 22 times, from HKD283 billion to HKD6,154 billion over the same period.

On the fiscal front, the government’s action in 2005 and 2006 to respectively provide for profits tax exemption for offshore funds and to abolish estate duty further enhances Hong Kong’s competitiveness as an international financial centre and encourages international investors to hold assets in Hong Kong. This in turn should attract more overseas companies and professionals which will facilitate the further development of Hong Kong’s asset management services.

Hong Kong was one of the very first jurisdictions in the world to allow the offering of hedge funds to the retail public, which started in 2002. As at March 31, 2007, the net asset size of the 14 authorised retail hedge funds was HKD12.96 billion.

Profit Tax Exemption

In March, 2006, Hong Kong's Legislative Council finally passed the Revenue (Profits Tax Exemption for Offshore Funds) Bill 2005.

Under the provisions in the Bill, offshore funds, i.e. non-resident entities (which can be individuals, partnerships, trustees of trust estates or corporations) administering a fund, are exempt from tax in respect of profits derived from dealings in securities, dealings in futures contracts and leveraged foreign exchange trading [as defined in the Securities and Futures Ordinance (Cap. 571) (SFO)] in Hong Kong carried out by specified persons such as corporations and authorized financial institutions licensed or registered under the SFO to carry out such transactions.

To prevent abuse or round-tripping by local funds disguised as offshore funds seeking to take advantage of the exemption, the Government has introduced as a deterrent measure specific anti-avoidance provisions to deem a resident holding a beneficial interest in a tax-exempt offshore fund to have derived assessable profits in respect of profits earned by such offshore fund in Hong Kong.

Islamic Investment

The Hong Kong Securities and Futures Commission authorised the first Islamic fund for sale to retail investors in the territory in November 2007.

The Commission's Intermediaries & Investment Products Executive Director, Alexa Lam explained that facilitating the development of the Islamic investment market is a high priority. "The introduction of Islamic retail funds gives added variety to our retail fund market and underscores the versatility of our asset management industry".

In support of the government's initiative to develop Hong Kong's Islamic finance capabilities, the Commission has been working with industry participants to enable the introduction of Islamic financial products to the Hong Kong market. It has also uploaded related educational materials to its website.

Islamic funds comply with the investment principles under the Islamic religious law of Sharia. The Sharia Principles preclude investments in businesses such as conventional financial services, alcohol, pork-related products, gambling, leisure and entertainment. Sharia principles also preclude interest bearing investments and investments in companies with unacceptable levels of debt.

Hedge Funds

In May, 2002, the SFC published guidelines governing the sale of hedge funds to retail investors. The guidelines, effective on May 17, divided 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 US$50,000, while funds of hedge funds, seen to be less risky, will require a minimum investment of US$10,000. 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 US$100 million worth of hedge funds under management.

In September, 2005, the SFC announced new hedge fund guidelines, effective immediately.

Taking into consideration the responses of the Consultation Paper, recent international regulatory developments, and the need to ensure investor protection, the SFC decided that: the minimum subscription threshold for SFC-authorised single hedge funds is maintained at US$50,000; 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.

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."

By 2010, assets managed by the hedge fund industry in Hong Kong had reached US$55.3bn.

On October 4, 2010, the SFC launched a one-month consultation to solicit public comments on a proposal to refine the requirements for evidencing whether a person qualifies as a high-net-worth professional investor.

The SFC is proposing a principles-based approach to the classification of high-net-worth professional investors upon acknowledging market participants’ views that they find it difficult in practice to ascertain and treat that group of investors as professional investors due to the very specific evidential requirements under the Securities and Futures (Professional Investor) Rules (Professional Investor Rules). While the minimum value of the relevant assets or portfolio will remain unchanged, firms will be able to use any method to satisfy themselves that an investor meets the required asset or portfolio threshold at the relevant date, as long as proper records of their assessment process are kept.

To enable firms that so wish to continue with existing practices, the current methods of establishing the different types of high-net-worth professional investors under the Professional Investor Rules will also be preserved. For example, in the case of high-net-worth individuals, firms may continue to require accountant’s certificates or custodian statements showing that the investor had the required portfolio threshold within a specified period prior to the relevant date.

“We believe the proposed principles-based approach is more in line with similar requirements in other leading markets, and will create more flexibility for firms to take steps that they consider necessary to satisfy themselves that their clients have the requisite assets or portfolio to be treated as professional investors,” said Martin Wheatley, the SFC’s Chief Executive Officer.

The scope of the consultation is limited to the methods to establish the asset or portfolio thresholds to prove the status of a high-net-worth professional investor. It does not review any of the other elements of the professional investor regime, including the assets/portfolio thresholds prescribed under the Professional Investor Rules or the provisions in the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.

For more information about alternative investment in Hong Kong, see here.

 

 

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