Hedge 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 allowing them to avoid Companies Ordinance and set up as private or public funds.
Companies Ordinance prohibits the increase or reduction in capital or payment of dividends without approval of the shareholders 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 comparison 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 position 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 opportunities 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 industry 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 Commission (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) programmes 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 believe 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.”