How to Start a Hedge Fund in Hong Kong

Updated on Wednesday 17th April 2019

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The main business destination for investment purposes in the Greater China Region is Hong Kong. Foreign investors may set up a hedge fund startup following the local regulations and it is important to know that the hedge fund market increased in this jurisdiction in the last years.

For example, the number of hedge funds registered in 2014 was 778. In 2016, Hong Kong registered more investment vehicles set up as hedge funds compared to Singapore, which is also one of the top investment destinations in Asia. At the same time, the value of the assets under management held by Hong Kong hedge funds increased by 38.8% in the same period. 

Regulatory framework for Hong Kong hedge funds

When opening a hedge fund startup in Hong Kong, local and foreign investors will have two options in this sense: private hedge funds and retail hedge funds. The regulatory framework applicable to private hedge funds stipulates that such entities are not required to obtain an authorization from the Securities and Futures Commission (SFC), the main institution which supervises the activity carried out through investment vehicles
Instead, the procedure on how to start a hedge fund in Hong Kong as a private structure stipulates that the fund will operate through the regulations available for fund managers. A fund manager carrying investment activities in Hong Kong will receive an authorization from the above mentioned institution, following the Part V of the Securities and Futures Ordinance. The regulations on how to start a fund in Hong Kong registered as a retail structure require the investors to obtain an authorization for the fund, issued by the SFC. 

What are the requirements for retail hedge funds in Hong Kong? 

The procedure on how to start an investment fund in Hong Kong as a retail hedge fund stipulates that the investors will also need to obtain an authorization from the SFC, just like in the case of a private hedge fund. The license is regulated under the same rule of law, the Securities and Futures Ordinance (SFO). This type of fund also needs to follow the regulations prescribed by the Code of Unit Trusts and Mutual Funds (Chapter 8.7)

What are the marketing requirements for Hong Kong hedge funds? 

When marketing a hedge fund in Hong Kong, investors must be aware that there are no differences between marketing a Hong Kong incorporated fund or a foreign fund. The difference regarding the marketing obligations is based on the type of hedge fund the investors operate here. Thus, in the case of vehicles registered as private hedge funds, the recipient can’t be the Hong Kong public, but the legislation available here prescribes several exemptions from this regulation, as follows: 
  • corporate bodies that are licensed by the Securities and Futures Commission;
  • banks, insurance companies and high net worth individuals, whose assets are of at least $8 million;
  • corporate bodies and partnerships that have a portfolio of minimum $8 million; 
  • corporate bodies and partnerships that have assets with a minimum value of $40 million;
  • trust companies with assets of at least $40 million and collective investment schemes

What are the main legal entities for Hong Kong Hedge funds? 

Those who want to register a hedge fund startup in Hong Kong have to select a legal entity, under which the fund will function. As a general rule, such funds can be incorporated in this country as companies or partnerships (more exactly, limited partnerships). 

In the case in which the investors are interested in creating a hedge fund with multiple compartments, the most suitable option would be the segregated portfolio company, another popular way to register a hedge fund. Through a segregated portfolio company, the fund will be able to carry out multiple investment strategies at the same time and each sub-fund will benefit from a separate pool of assets.

It is necessary to know that through this structure, the investors of the fund will be able to appoint a fund manager for each of the sub-fund, or they may use the services of the same manager, regardless of how many compartments the fund has. 

What are the main taxes for hedge funds in Hong Kong? 

Besides the investment conditions available in a given jurisdiction, the types of legal entities that can be registered for a hedge fund and others, investors are also interested in the taxation system applicable to an investment structure. Those interested in how to open a fund in Hong Kong should know that the fund can be charged with the profits tax, currently imposed at the rate of 16,5%, but only as long as the fund develops an activity that can be considered a trade. 

The profits tax can generally be imposed to persons as well, but resident investors in Hong Kong are not liable for the payment of this tax, provided that specific conditions are met, a regulation which is also available for non-resident investors investing in hedge funds in Hong Kong.  


Requirements for the hedge fund manager 

In order to carry out an investment activity in Hong Kong, the investors are required to appoint a fund manager. A fund manager in Hong Kong must comply with the SFC’s requirements, attesting his or her qualities in the financial field. In this sense, investors interested in how to start an investment fund in Hong Kong should know that the fund’s manager has to follow the regulations provided by the Fund Manager Code of Conduct

The Fund Manager Code of Conduct is applicable to fund managers of both private and retail hedge funds registered in Hong Kong. This code prescribes the main obligations fund managers have in relation with the hedge fund. For example, they need to safekeep the fund’s assets and to increase their value, but they can also be in charge with appointing a custodian; the latter needs to satisfy a set of legal requirements in order to be able to handle the assets of a fund

Following the latest modification on the regulations prescribed by the Fund Manager Code of Conduct, the fund managers of private funds are legally obliged to appoint a suitable custodian; however, an exemption is applicable in this case, but only as long as the fund opted for a self-custody option. 

Among the obligations of a hedge fund manager is to make sure that the agreement between the fund and the custodian is drafted and signed according to the law; thus, when signing a written custodian agreement, the hedge fund manager has to verify its content and its stipulations. In order to become the fund manager of a hedge fund, the person will need to obtain a Type 9 regulated activity license, and this is necessary regardless of the type of hedge fund registered in Hong Kong
The hedge fund manager has to perform regular valuations of the fund, in order to calculate the net asset value. Further on, the manager has to ensure that the company meets the criteria on internal control, for matters such as auditing or training. Businessmen are invited to contact our team of affiliates in Hong Kong for more information on the registration of a hedge fund and the tax regulations applicable to this vehicle.