Types of Investment Funds in Hong Kong
Updated on Monday 07th October 2019
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The legislation in Hong Kong prescribes the registration of a wide category of investment funds. Foreign and local investors can set up alternative investment funds here; the procedure on how to start an investment fund that is registered as an alternative investment fund (AIF) is given by the Securities and Futures Ordinance.
What are the basic categories of Hong Kong funds?
Investment funds in Hong Kong are divided between two main categories, namely open-ended investment funds and closed-ended funds. Investment vehicles operating as retail open-ended funds are regulated under the same rule of law mentioned above, the Securities and Futures Ordinance, but also by the Companies Ordinance.
In the case of funds that are listed on the stock market, additional regulations apply (the provisions of Chapter 20 of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (also referred to as the Listing Rules). In the case of a closed-ended fund, the regulations of the Listing Rules will also apply.
Closed-ended funds in Hong Kong can also take the form of real estate investment trusts (REIT); in this case, the REIT has to be listed with the Stock Exchange of Hong Kong Limited and for this, it needs the approval of the main institution regulating the investment market in this country, the Securities and Futures Commission (SFC).
How many funds are authorized by the SFC?
As mentioned above, the legislation in Hong Kong offers diversified types of funds. Businessmen who want to set up a hedge fund startup have this possibility as well; besides this, local vehicles can be registered as money market funds, equity funds, bond funds or as guaranteed funds, to name a few. At the same time, investment vehicles here can be incorporated with multiple compartments. The data on the unit funds and mutual funds authorized by the SFC at the level of March 2017 is presented below:
- in March 2017, there were a total of 2,203 funds that received authorization from the SFC;
- the SFC authorized 430 bond funds, with a net asset value of $438,219 million;
- there were 1,018 equity funds, with a total net asset value of $599,102 million;
- Hong Kong had 162 diversified funds and 44 money market funds;
- the SFC authorized 113 funds of funds and 182 index funds;
- there were also 3 guaranteed funds and 2 hedge funds;
- in March 2017, the institution also authorized 242 funds operating as umbrella structures.
What should an investor know on Hong Kong hedge funds?
One of the ways of investing on the local financial market is by starting a hedge fund; in this country, the hedge fund falls under the regulations available for AIFs. In this case, it is necessary to know that specific requirements must be completed. For example, in the case of a hedge fund startup in Hong Kong, the investors have limited liability against the fund’s debts, which is limited to the value of the investment in the fund. In the case of a retail hedge fund, the following are available:
- the retail hedge fund must have at least one regular dealing day during a month;
- an exemption is granted in this case of retail hedge funds operating as a closed-ended fund;
- the manager of the fund has the right to limit the redemption of shares in retail hedge funds registered as open-ended structures;
- the above mentioned rule applies in specific cases and it can also be imposed to hedge funds registered as closed-ended vehicles;
- this type of fund must present in its constitutive documents the investment strategies followed by the fund and the financial instruments used for investments.
It is worth knowing that the manager of this type of fund must also prepare the measures that can be employed, provided that there is a conflict of interest amongst the fund’s representatives. Such measures have to be disclosed. Additional regulations that are imposed to retail hedge funds in Hong Kong can be found in the Guidelines on Hedge Funds Reporting Requirements. This document clearly states the types of data the fund’s manager has to disclose on a regular basis to the owners of the fund.
Funds in Hong Kong are also required to respect specific reporting requirements. This is applicable based on the type of fund that was selected for incorporation; thus, those who are interested in how to start a hedge fund in Hong Kong must also verify the conditions imposed in this case.
However, in the case of a retail hedge fund, the reporting has to be done on a quarterly and yearly basis. More information on how to start a fund in this country can be provided by our team of affiliates in Hong Kong, who can also offer advice on other types of funds that can be incorporated here.