Hong Kong domiciled funds – a changing landscape
20 December 2012
Category: News, Global, Hong Kong
By Asia Asset Management
The majority of funds available to the Hong Kong public are UCITS funds domiciled in Ireland or Luxembourg. Often the offering documents for these funds need to be amended to meet Hong Kong disclosure requirements. In practice, product issuers invariably need to go back to their home regulators to seek further approval in respect of such amendments. A locally domiciled unit trust dedicated to the Hong Kong market would avoid these hurdles, argues Deacons partner Alwyn Li.
A Hong Kong domiciled platform would not only allow greater flexibility in meeting local standards and disclosure requirements, but it would also open up other opportunities for product issuers. For example, an Approved Pooled Investment Fund for sale to MPF (mandatory provident fund) local retirement schemes needs to be Hong Kong domiciled. Also, as real estate properties are no longer eligible investments for the Immigration Department's Capital Investment Schemes, many fund houses are taking advantage of the gap by setting up and registering their Hong Kong domiciled fund products for such purposes.
Currently Hong Kong funds are established as unit trusts as restrictions in the Companies Ordinance on share buy backs and the reduction of share capital make companies with variable capital impractical.
To facilitate the development of the mutual funds industry in Hong Kong, the government has initiated discussions on a legal framework for locally domiciled open-ended or variable capital investment companies. Unlike a unit trust platform, the benefit of an open-ended investment company is that it has a separate legal identity. Also, trustees of a unit trust platform are mindful of the onerous duties and fiduciary obligations imposed on them under trust law, which can lead to inflexibility. As such, many hedge fund managers prefer an open-ended investment company vehicle.
It has recently been reported that Hong Kong's Financial Services Treasury Bureau has made a proposal to the China Securities Regulatory Commission on mutual recognition. Under the proposal, Hong Kong domiciled funds could be sold to Mainland investors and, in turn, PRC domiciled funds could be sold to Hong Kong investors. Generally, fund managers welcome such possible reforms which, for international houses, would make a Hong Kong domiciled platform more attractive.